November 2016
IMF Country Report No. 16/362
HONDURAS
2016 ARTICLE IV CONSULTATION, THIRD AND FOURTH
REVIEWS UNDER THE STAND-BY ARRANGEMENT AND
THE ARRANGEMENT UNDER THE STANDBY CREDIT
FACILITY—PRESS RELEASE AND STAFF REPORT
In the context of the 2016 Article IV Consultation, Third and Fourth Reviews under the
Stand-By Arrangement and the Arrangement under the Standby Credit Facility, the
following documents have been released and are included in this package:
A Press Release issued at the completion of the Third and Fourth Reviews.
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on October 26, 2016, following discussions that ended on
June 13, 2016, with the officials of Honduras on economic developments and
policies.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Honduras.
The documents listed below have been or will be separately released:
Selected Issues and Analytical Notes
Letter of Intent sent to the IMF by the authorities of Honduras*
Memorandum of Economic and Financial Policies by the authorities of Honduras*
Technical Memorandum of Understanding*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.
Copies of this report are available to the public from
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International Monetary Fund
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© 2016 International Monetary Fund
Press Release No. 16/482
FOR IMMEDIATE RELEASE
November 2, 2016
International Monetary Fund
Washington, D.C. 20431 USA
IMF Completes Third and Fourth Reviews Under SBA and SCF
with Honduras
On October 26, 2016, the Executive Board of the International Monetary Fund (IMF)
completed the combined third and fourth reviews of Honduras’ performance under an
economic program supported by a three-year Stand-By Arrangement (SBA) and a two-year
arrangement under the Stand-By Credit Facility (SCF). This blended program was approved
on December 3, 2014 in the amount of about US$188.6 million (SDR 129.5 million), the
equivalent of 100 percent of Honduras’ quota in the IMF at that time (see Press Release No.
14/545).
The Executive Board also approved a rephasing of the SBA to take into account the increase
in Honduras’ First Credit Tranche as a result of its quota increase (from SDR 129.5 million
to SDR249.8 million) under the Fourteenth General Review of Quotas. The completion of
the reviews enables the authorities to access resources in the total amount of about
US$168.20 million (SDR 121.875 million). The authorities have expressed their intention to
continue to treat the arrangements as precautionary.
The Board granted a waiver of the end-December 2015 performance criterion on the ceiling
of the stock of net domestic assets (NDA) as the authorities have corrected the deviation by
observing the end-June 2016 target. In addition, on the basis of corrective policy measures
taken, the Board also granted a waiver on the non-observance of the end-June performance
criterion on net lending by the public pension funds and on the arrears from state electricity
company (ENEE).
Following the Executive Board’s discussion of the reviews, Mr. Mitsuhiro Furusawa, Acting
Chair and Deputy Managing Director, said:
“Honduras’s economic reform program supported by the Fund’s blended Stand-By
Arrangement and Standby Credit Facility has made considerable progress in restoring
macroeconomic stability, reducing the fiscal deficit, and tackling some structural issues. At
2
the same time, the external current account deficit has narrowed, private credit is expanding
at a sustainable pace, and net international reserves have risen. Together, these favorable
developments have contributed to a systematic improvement in Honduras’s international
sovereign debt credit ratings.
“The authorities have signaled their intention to institutionalize hard-won fiscal discipline.
The adoption in April 2016 of the fiscal responsibility law, which over the medium term
would cap public spending and change its composition in favor of investment, is a significant
step. The steadfast implementation of this law and other planned measures to increase public
sector efficiency are critical to ensure that public debt ratios decrease over the medium term.
The consolidation of the reforms in the electricity sector are crucial to further strengthen
public finances and foster competition in the electricity market.
“Reforms to the monetary policy framework and exchange rate regime are needed to give the
central bank the necessary tools to effectively respond to external shocks. To support these
reforms and the ongoing process of de-dollarization and financial market development,
measures to strengthen the central bank need to be fast tracked. At the same time, financial
stability should be reinforced by enhancing the bank resolution framework and strengthening
prudential regulations on household debt.
“Honduras’s poverty level and informality remain high, while potential growth and
employment remain relatively low. While social spending has been protected, structural
reforms to boost growth and employment should focus on reducing crime and violence;
closing infrastructure gaps, especially in energy; and increasing financial market access for
poor households and the efficiency of public spending.”
Press Release No. 16/518
FOR IMMEDIATE RELEASE
November 22, 2016
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
IMF Completes 2016 Article IV Consultation with Honduras
On October 26, 2016, the Executive Board of the International Monetary Fund (IMF) concluded
the Article IV Consultation with Honduras1.
In 2015, real output grew at 3.6 percent, slightly higher than projected. From the demand side,
growth was supported by the recovery in private consumption—which responded positively to a
reduction in gasoline prices and strong remittances inflows—and a boost in investment. On the
supply side, the recovery in manufacturing and agriculture supported greater activity. At the
same time, headline inflation decelerated to 2.4 percent from 5.8 percent in the previous year,
well below the inflation target of 4.5 percent—owing to strong demand management policies and
lower fuel prices. The fiscal position also improved, as the primary balance moved into surplus,
implying an impressive fiscal adjustment of 6.5 percentage points of GDP relative to 2013. This
fiscal adjustment, along with lower oil imports, helped to narrow the external current account
deficit to 6.3 percent of GDP in 2015. As a result, net international reserves increased by
US$307 million, supported by private capital inflows. Together, these favorable developments
have contributed to a systematic improvement in Honduras’ international sovereign debt credit
ratings.
The outlook for 2016 remains favorable. Real GDP through 2016 Q2 grew by 4.1 percent (y/y)
broadly consistent with staff’s projection of 3.6 percent for the year. This projected growth
performance is supported by scaled up public infrastructure investment and a supportive
monetary policy stance. Inflation through August 2016 was 2.5 percent (y/y), and is projected to
remain low. In line with the existing program and the Fiscal Responsibility Law (FRL), the
nonfinancial public sector deficit is expected to widen to 1.5 percent of GDP from 1.0 percent to
accommodate planned investment in infrastructure. At the same time, consistent with expanding
real sector activity and greater private sector confidence, credit to the private sector is expected
to grow by 10 percent in nominal terms, in line with a sustainable pace of financial deepening.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually
every year. A staff team visits the country, collects economic and financial information, and discusses with officials
the country's economic developments and policies. On return to headquarters, the staff prepares a report, which
forms the basis for discussion by the Executive Board.
2
Program performance remains satisfactory. The authorities have advanced important reforms to
help create the conditions for sustained medium-term economic performance and poverty
reduction. These reforms include, most notably, the adoption of caps on expenditure and the
prioritizing of public investment under the FRL, reforms to tax administration, a social
protection framework, and an overhaul of the electricity sector. In addition, the authorities have
embarked on a comprehensive reform of the framework for bank resolution, comprising
extensive legal amendments and a significant strengthening of the authorities’ capacity for
dealing with financial sector distress.
Executive Board Assessment2
Executive Directors commended the authorities’ improved macroeconomic policy mix under
their Fund-supported program, which has stabilized the economy and has resulted in higher
economic growth, low inflation, stronger fiscal and external positions, and progress in
implementing social policies. Noting that important economic and social challenges remain
ahead, Directors encouraged the authorities to press forward with their prudent policies and
reform momentum to achieve stronger and more inclusive growth while safeguarding
macroeconomic and financial stability.
Directors welcomed the authorities’ fiscal consolidation efforts and the recent adoption of the
fiscal responsibility law (FRL). They encouraged the authorities to work assiduously to quickly
operationalize the law’s provisions and clarify its implications for extra-budgetary programs.
While also welcoming the authorities’ decision not to renew ineffective tax exemptions once
they have expired, Directors urged a more proactive approach to rationalizing tax exemptions in
general. On the spending side, they supported the authorities’ plan to adopt a results-based
approach to spending programs in health and education, which is an initial step to increase
spending efficiency. Directors called for additional reforms in the electricity sector to strengthen
public finances and foster competition in the electricity market.
Directors agreed that the supportive monetary policy stance remains appropriate. Given a more
neutral policy rate, the closing output gap, and the planned recovery of the real electricity costs,
they urged the Central Bank of Honduras (BCH) to be cautious against further easing in the near
term. Directors called on the BCH to remain vigilant and be ready to tighten policy if inflation or
credit growth were to accelerate and signs of overheating were to emerge.
Directors welcomed the authorities’ decision to move toward a more flexible exchange rate
regime and an inflation targeting framework. To support these decisions, they encouraged the
authorities to press ahead with plans to develop domestic and foreign exchange markets, reform
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of
Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers
used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
3
the central bank law to give the BCH a clear mandate to achieve price stability, and speed up the
de-dollarization process.
Directors recommended focusing on key medium-term reform priorities to achieve higher
growth and employment now that the economy has stabilized. They encouraged the authorities to
press ahead with efforts to improve the rule of law, competitiveness, and the business climate.
Directors welcomed the recently launched new medium-term economic development strategy
Honduras 2020.
4
Honduras: Selected Economic Indicators
2011
2012
2013
2014
Prel.
2015
Proj.
2016
Proj.
2017
(Annual percentage change, unless otherwise indicated)
National income and prices
GDP at constant prices
GDP deflator
Consumer prices (eop)
Exchange rate (eop, depreciation -)
Lempiras per U.S. dollar 1/
Real effective rate 2/
Money and credit
Private sector credit
Broad money
Lending rate (eop, in percent) 3/
Deposit rate (eop, in percent) 3/
Nonfinancial public sector
Primary balance
Overall balance
Nonfinancial Public Sector gross debt
Of which: External debt
Public sector external debt service (in percent
of nonmaquila exports)
Savings and investment
Gross fixed capital formation
Gross national savings
External sector
Gross international reserves (millions of dollars)
GIR (In months of imports) 4/
Change in net international reserves (increase -)
External current account balance
Exports, f.o.b. (annual percentage change)
Imports, f.o.b. (annual percentage change)
3.8
7.8
5.6
19.1
1.8
9.6
12.7
14.2
7.4
-3.4
-3.2
25.5
18.3
4.4
24.4
16.5
3,043
3.6
50
-8.0
27.3
24.9
4.1
3.6
5.4
20.0
-1.7
16.9
6.6
16.7
11.4
-4
-4.4
30.2
20.2
3.0
24.4
15.8
2,778
3.3
367
-8.6
4.8
2.2
2.8
1.4
4.9
20.7
0.4
11.2
8.4
16.9
11.0
-7.0
-7.5
40.2
28.5
3.6
21.8
12.2
3,255
3.8
-546
-9.6
-6.6
-3.7
3.1
5.5
5.8
21.6
3.6
10.7
13.2
15.9
10.4
-3.5
-3.9
40.9
29.3
4.4
22.1
14.6
3,698
4.3
-264
-7.4
3.4
1.1
3.6
6.3
2.4
22.4
1.6
10.4
8.7
14.0
8.8
0.1
-1.0
40.9
29.5
8.6
25.2
18.8
3,992
4.5
-307
-6.3
-0.4
0.2
3.6
3.0
4.0
22.9
-0.7
10.8
9.1
12.3
7.6
-0.2
-1.2
41.9
30.7
8.3
26.4
20.5
3.7
3.1
4.5
…
…
11.1
9.4
…
…
-0.1
-1.5
43.2
32.3
8.6
26.8
21.1
4,385 4,648
4.7
-245
-5.7
6.1
5.3
4.7
-222
-5.9
2.0
2.3
Sources: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections.
1/ 2016 data as of August 29.
2/ 2016 data as of July.
3/ 2016 data as of June.
4/ Refers to the following year's imports of nonmaquila goods and nonfactor services.
HONDURAS
October 13, 2016
2016
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION,
THIRD AND FOURTH REVIEWS UNDER THE STAND-BY
ARRANGEMENT AND THE ARRANGEMENT UNDER THE
STANDBY CREDIT FACILITY
KEY ISSUES
Context: Since the last Article IV consultation in 2014, the Honduran economy has
stabilized and macroeconomic conditions have improved considerably. Looking ahead, the
Honduran economy is expected to grow just below potential, at about 3.6 percent in 2016,
before gradually converging to potential (3.8 percent) over the medium term. Inflation is
projected to rise somewhat, but remain in line with the BCH inflation target of 4.5 percent.
The external position has strengthened and prudent fiscal policy is being institutionalized
with the recent enactment of the fiscal responsibility law (FRL). The banking system
appears sound, and private credit growth is expanding at a sustainable pace. On the
political front, the next Presidential elections are scheduled for November 2017.
Risks are tilted to the downside. A sharper-than-expected slowdown in global growth
could significantly reduce growth, triggering a reversal in capital inflows, a reduction in
international reserves and/or a depreciation of the currency thus increasing credit risk from
unhedged FX borrowing. Additional risks come from the potential withdrawal of
correspondent banking relationships, disrupting international financial flows, and failure to
address deep-rooted problems affecting competitiveness.
Program issues: Program performance remains satisfactory. The authorities have met
most performance criteria and all of the indicative targets for end-December 2015 and
end-June 2016. Staff recommends completing the third and fourth reviews under the
SCF/SBA arrangements. Staff supports granting a waiver on the PC on the NDA ceiling for
end-December 2015, on the grounds that the deviation was corrected by end-June 2016,
and also supports the authorities’ request for a waiver on the non-observance of the end-
June PCs on net lending by the public pension funds and on the arrears from ENEE on the
basis of corrective policy measures that are being taken. Honduras’s SBA arrangement
needs to be rephased to incorporate the increase in Honduras’s quota under the
Fourteenth General Review of Quotas, and the resulting increase in its first credit tranche.
Article IV discussions: With the economy stabilized, the reform momentum should focus
on increasing potential growth, lowering unemployment and poverty, and fighting
corruption. To support these efforts, the authorities would have to improve the efficiency
of public spending, reduce the energy infrastructure deficit, and facilitate financial
development. Most recommendations from previous Article IV Consultations have been
adopted.
HONDURAS
Approved By
R. Rennhack (WHD)
and Z. Murgasova
(SPR)
CONTENTS
Discussions took place in Tegucigalpa during June 2-13, 2016. The
mission comprised R. Garcia-Saltos (Head), G. Nicholls, M. Dehesa,
D. Plotnikov (all WHD), J. Kapsoli (FAD) and D. Cerdeiro (SPR).
CONTEXT _________________________________________________________________________________________ 4
RECENT DEVELOPMENTS ________________________________________________________________________ 4
OUTLOOK AND RISKS ___________________________________________________________________________ 9
PROGRAM PERFORMANCE AND PAST FUND ADVICE _______________________________________ 12
PROGRAM REVIEW _____________________________________________________________________________ 14
A. Building Stronger Fiscal Institutions to Reduce Fiscal Dominance _____________________________ 14
B. Modernizing Monetary and Exchange Rate Policy _____________________________________________ 15
C. Creating a More Resilient Financial Sector _____________________________________________________ 18
D. Other Program Issues _________________________________________________________________________ 21
MAIN THEMES OF THE ARTICLE IV POLICY DISCUSSIONS ___________________________________ 22
A. Increasing Inclusive Growth and Reducing Crime and Violence _______________________________ 22
B. Increasing Public Expenditure Efficiency and Improving Energy Infrastructure ________________ 25
C. Financial Development ________________________________________________________________________ 28
STAFF APPRAISAL ______________________________________________________________________________ 30
BOXES
1. External Balance Assessment ____________________________________________________________________6
2. Response to 2014 Article IV Consultation’s Key Recommendations ___________________________ 13
3. Estimates of the Neutral Interest Rate _________________________________________________________ 16
4. Fiscal Reform in Honduras: A Foundation for Inclusive Growth ________________________________ 24
5. The Efficiency of Social Spending in Honduras ________________________________________________ 27
FIGURES
1. Economic Performance since 2014 Article IV Consultation ______________________________________8
2. Growth is Strengthening Amid Stable Macro Policies and Better External Conditions _________ 33
3. The External Position Has Strengthened on the Back of Favorable Terms of Trade
Movements ______________________________________________________________________________________ 34
4. Monetary Conditions Have Remained Favorable ______________________________________________ 35
2
INTERNATIONAL MONETARY FUND
HONDURAS
5. Fiscal Consolidation Has Moved Ahead of Schedule __________________________________________ 36
TABLES
1. Financial Stability Heat Map and Credit Cycle ___________________________________________________7
2. Medium-Term Scenario ________________________________________________________________________ 10
3. Summary of The Combination Scenario Stress Test ___________________________________________ 20
4. Summary Table of Projected External Borrowing Program ____________________________________ 21
5. Central America: Selected Indicators of Financial Development _______________________________ 29
6. Selected Economic Indicators __________________________________________________________________ 37
7a. Operations of the Central Government _______________________________________________________ 38
7b. Statement of Operations of the Central Government ________________________________________ 39
8a. Statement of Operations of the Nonfinancial Public Sector (In millions of Lempiras) ________ 40
8b. Statement of Operations of the Nonfinancial Public Sector (In percent of GDP) _____________ 41
9. Summary Accounts of Central Bank and Financial System _____________________________________ 42
10. Balance of Payments _________________________________________________________________________ 43
11. External Financing Needs and Sources _______________________________________________________ 44
12. Medium-Term Macroeconomic Framework __________________________________________________ 45
13. External Vulnerability Indicators ______________________________________________________________ 46
14. Structure and Performance of the Banking Sector ___________________________________________ 47
15. Millennium Development Goals ______________________________________________________________ 48
16. Disbursements, Purchases, and Timing of Reviews under the SCF/SBA Arrangements _______ 49
17. Indicators of Fund Credit _____________________________________________________________________ 50
ANNEXES
I. Debt Sustainability Analysis ____________________________________________________________________ 51
II. External Assessment ___________________________________________________________________________ 66
III. Risk Assessment Matrix _______________________________________________________________________ 71
IV. The Trans-Pacific Partnership and Honduras __________________________________________________ 72
APPENDICES
I. Letter of Intent _________________________________________________________________________________ 74
Attachment I. Memorandum of Economic and Financial Policies for 2016–17 ___________ 76
Attachment II. Technical Memorandum of Understanding _______________________________ 90
INTERNATIONAL MONETARY FUND
3
HONDURAS
CONTEXT
1. Significant macroeconomic challenges have affected Honduras’ economy. The country
has been, for decades, afflicted by a combination of volatile growth and weak public finances, and
recently by high crime. The peak of this unstable situation occurred in 2013 when the relaxation of
fiscal policy led to a rapid increase in public debt and to cash-flow pressures, resulting in the
combined public sector (CPS) deficit rising to 7.6 percent of GDP, from 2.8 percent of GDP in 2011.
At the same time, a real appreciation of the exchange rate and less favorable terms of trade led to a
sizeable increase in the external current account deficit and limited reserve coverage.
2.
In 2014, the authorities adopted an IMF-supported program to achieve
macroeconomic stability and improve the conditions for sustainable and inclusive growth.
After 2½ years in office the government is succeeding in improving domestic security, stabilizing the
economy, and institutionalizing fiscal discipline with the approval of the Fiscal Responsibility Law
(FRL). It is paving the way to combat corruption—for which the country signed an agreement with
the Organization of American States (OAS) to establish a support mission against corruption and
impunity. In April 2016, the Supreme Court cleared the legal hurdles to presidential reelection in the
upcoming general elections in November 2017.
3. Since the last Art. IV consultation in 2014, near-term macroeconomic conditions have
improved considerably. Coupled with better performance on growth and inflation, the reduction in
the fiscal deficit by 6½ percentage points of GDP in the two years ending in 2015 improved fiscal
sustainability and thus confidence––as indicated by the systematic improvement of international
sovereign debt credit ratings. These elements have also bolstered the demand for domestic assets
thus contributing to rebuild private sector balance sheets, lowered the cost of capital for domestic
investors, and strengthened international reserves.
4. The key priorities for the medium-term are to raise potential growth and reduce
unemployment, poverty and crime. To support these efforts, strategies would be needed to
improve the efficiency of public spending, upgrade the energy infrastructure, and strengthen
financial development.
RECENT DEVELOPMENTS
5. Economic performance in 2015 was better than expected. Real output grew at
3.6 percent, slightly more than projected. From the demand side, growth was supported by the
recovery in private consumption—which responded positively to a reduction in gasoline prices and
strong remittances inflows—and a boost in investment.1 Growth of exports of goods and services
accelerated on the back of stronger U.S. demand. On the supply side, recovery in manufacturing––
mostly textile and food processing––and agriculture––mainly coffee and banana––which benefited
1 By distinguishing among all possible drivers of oil price movements, staff analysis found that lower oil prices may
have raised GDP growth by ½ percent in 2015 (see Selected Issues Paper: Macroeconomic Impact of Oil Prices).
4
INTERNATIONAL MONETARY FUND
HONDURAS
from introduction of plague and weather resistant species, supported growth. Financial
intermediation also continued to grow steadily, benefiting from higher revenues from mortgages
and consumption credit (Figure 1). Real GDP through 2016Q2, grew by 4.1 percent (y/y), supported
by expansions in net exports and private consumption. This growth performance for 2016 thus far is
broadly consistent with staff’s projection of 3.6 percent growth for the year.
6. Lower international oil prices have helped to reduce headline inflation, and narrow the
external current account deficit. In 2015, headline inflation decelerated to 2.4 percent from
5.8 percent in the previous year, well below the inflation target of 4.5 percent. Inflation through
August 2016, remained temporarily low at 2.5 percent (y/y). This performance reflected lower
international oil prices and a still negative output gap.2 Meanwhile, the external current account
deficit narrowed to 6.3 percent of GDP in 2015, because of lower oil imports. As a result, NIR
increased by US$307 million, supported by private capital inflows in excess of program projections.
Meanwhile reserves have fallen slightly after meeting program targets last June, but remain
adequate at about 4.5 months of imports at over US$2.6 billion.
7. The external position is moderately weaker than the level consistent with medium-
term fundamentals and desired policies. The assessment is based on the strength of the real
effective exchange rate (REER), and robust non-oil import growth. This partly reflects the effects of
terms of trade shifts on the appreciation of the USD relative to the currencies of some trading
partners. Going forward, the full pass-through to inflation of some partner’s nominal depreciations
may partially reverse the recent appreciation, and planned steady fiscal consolidation will help
improve competitiveness. The impact of these policies would be enhanced by continued wage
moderation and reforms that address weaknesses in the business environment (Box 1).
8. The fiscal position remains strong. The public sector posted a deficit of 1 percent of GDP
in 2015. The primary balance moved to the surplus side, implying an impressive fiscal adjustment of
6½ percentage points of GDP relative to the pre-program outcome. This result is mainly explained
by a reduction of about 5½ percentage points of
GDP in spending since 2013, chiefly in the wage bill
and in the purchases of goods and services. With
this result, the public sector debt reached 41
percent of GDP. During the first semester of 2016,
the public sector posted a surplus of 1.5 percent of
GDP, ½ percent of GDP higher relative to the same
period of 2015. This result is explained by better
results of decentralized institutions and local governments.
2 Staff estimates that a ten percent oil price decrease leads to approximately 0.3 percent decrease in inflation.
INTERNATIONAL MONETARY FUND
5
Fiscal consolidation6.5Revenue1.2 Of which: taxes2.6Expenditure5.3 Of which: compensation of employees2.3Sources: Honduran authorities and Fund staff estimates.Fiscal Consolidation, 2013-2015(In percent of GDP)
HONDURAS
9. Recent financial sector indicators for
2015 suggest that the banking system
remains sound. Against the backdrop of
improved financial conditions and lower risks,
balance sheet buffers appear adequate (Table 1).
Nonperforming loans to total loans remain
relatively low, profitability is high, and the
leverage ratio, at 10 percent, is well below crisis
threshold rating. Meanwhile, balance sheet risks
remain moderate. Specifically, liquidity remains
ample, and credit dollarization has fallen by 1½
percentage points to 33.2 percent, mainly
because of tighter regulations on foreign
exchange exposure. At the same time, credit
cycle risk remains low, as private sector credit,
currently at about 56 percent of GDP, has been
Honduras: Financial Stability Map1
1 See the April 2010 Global Financial Stability Report (GFSR),
especially Annex 1.1, for a methodology underlying the
Financial Stability Map.
expanding at a sustainable rate, well below the
threshold that defines a credit boom.3 In line with this, household and private sector balance sheets
remain sound, although a wider net foreign currency deficit of the private sector makes it more
vulnerable to exchange rate risks.
Box 1. External Balance Assessment
The Fund’s multilaterally consistent estimates under the External Balance Assessment (EBA) methodology,
indicate that the external position is moderately weaker than the level consistent with fundamentals and
desirable policies given Honduras’s low income level, young population and strong remittances inflow. The
REER regression predicts a REER about 7 percent lower (i.e. more depreciated), considering Honduras terms
of trade, trade openness, and other fundamentals. The current account regression finds virtually no
misalignment, but this is partly due to a lower than desirable fiscal deficit that accounts for most of the
identified policy gap. At the same time, some signs of structural competitiveness problems, such as low
human capital as well as other impediments to doing business, including high crime and corruption, and low
physical capital and weak infrastructure highlight the need for productivity-enhancing reforms.
10. Private sector credit is expanding amid a decline in lending rates. The gradual easing of
monetary policy that followed the implementation of the SBA/SCF-supported program has
3 See Dell’Ariccia and others “Policies for Macrofinancial Stability: How to Deal with Credit Booms,” IMF SDN/12/06,
for a methodology describing the computation of these thresholds.
6
INTERNATIONAL MONETARY FUND
Actual CA/YUnderlying CA/YCA/Y normCA/Y gap (Actual or Underlying - Norm)REER gapCA model-6.3-6.70.3-1.1REER model7.1ES approach-5.1-3.1-2.07.0Source: IMF Staff calculations based on External Balance Assessment methodology.Table. Honduras External Assessment
HONDURAS
contributed to a steady expansion in total credit growth and more importantly to a gradual pickup
in credit denominated in domestic currency as lending rates inched lower with a lag. As inflation
moved further below the central bank’s inflation target, additional policy rate reductions were made,
the last being in June 2016. Lower policy rates have broadly influenced the direction of interbank
rates (although the movements have been sluggish) and lending rates by commercial banks. In
addition, banking spreads have begun to inch lower with improved conditions and lower risks in the
economy. These two factors have created easier financial conditions leading to a reduction in credit
dollarization.
Table 1. Honduras: Financial Stability Heat Map and Credit Cycle
Sources: National Banking and Insurance Commission (CNBS), and IMF staff calculations.
INTERNATIONAL MONETARY FUND
7
Honduras2013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q2Overall Financial Sector RatingMMMMMMMMMMMCredit cycleMLLLLLLLLLLChange in credit / GDP ratio (pp, annual)3.42.82.21.61.00.90.90.90.10.50.8Growth of credit / GDP (%, annual)6.75.44.12.91.81.71.71.60.20.91.5Credit-to-GDP gap (st. dev)1.30.90.4-0.1-0.8-1.5-1.7-1.8-2.1-1.6-1.3Balance Sheet SoundnessMMMMMMMMMMMBalance Sheet Structural RiskMMMMMMMMMMMDeposit-to-loan ratio94.895.995.093.896.298.899.097.597.398.298.0FX liabilities % (of total liabilities)37.237.036.937.138.036.236.536.436.136.035.3FX loans % (of total loans)32.934.234.033.534.034.933.632.932.532.931.4Balance Sheet BuffersLLLLLLLLLLLLeverageLLLLLLLLLLLLeverage ratio (%)9.18.99.49.39.29.08.88.98.78.78.6ProfitabilityLLLLLLLLLLLROA1.41.41.41.41.41.31.31.31.41.21.3ROE14.513.813.413.313.412.513.113.514.611.813.5Asset qualityLMLMLLLLLMMNPL ratio3.43.63.74.03.33.43.43.73.13.73.6NPL ratio change (%, annual)3.29.2-0.77.7-3.6-7.7-10.0-7.4-6.610.96.9Memo items:2013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q2Credit-to-GDP (%)54.354.654.855.055.355.555.755.955.456.056.5Credit-to-GDP gap (%; HP filter)1.31.21.10.90.80.60.50.3-0.6-0.3-0.2Credit growth (%; annual)11.211.010.910.810.710.610.610.510.49.810.3CAR (in %)14.514.214.914.514.614.514.014.114.013.913.7
HONDURAS
Figure 1. Honduras: Economic Performance since 2014 Article IV Consultation
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The economy is recovering better than expected…..… aided in part by better terms of trade, specially lower oil prices…… which helped to contain inlfation at low levels…… and also stremghten the domestic financial position……but recovery is supported by stronger fiscal performance …… and better external position…...including on the perfromance of the current account…… public debt over GDP in a downward path ahead of schedule.
2.02.53.03.54.02013201420152016201720182019PercentReal GDP Growth
2016 AIV
Original Program
2014 AIV
2.03.04.05.06.07.08.02013201420152016201720182019PercentCPI Inflation, eop
2016 AIV
Original Program
2014 AIV
3439444954592013201420152016201720182019Percent of GDPPublic Debt
2016 AIV
Original Program
2014 AIV
-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.02013201420152016201720182019Percent of GDPConsolidated Public Sector Balance
2016 AIV
Original Program
2014 AIV
01000200030004000500060002013201420152016201720182019Millions of USDGross International Reserves
2016 AIV
OriginalProgram
2014 AIV
-10-9-8-7-6-5-42013201420152016201720182019Percent of GDPExternal Current Account 1/
2016 AIV
Original Program
2014 AIV
-4-2024682013201420152016201720182019Percentage changeTerms of Trade
2016 AIV
Original Program
2014 AIV
7080901001101202013201420152016201720182019Percent of GDPTotal Bank Assets
2016 AIV
2014 AIV
1/ Left axis in reverseorder.
Source: CentralBank of Honduras, Ministry of Finance and Fund staff estimates and projections.
The economy is recovering better than expected…
…aided in part by better terms of trade, especially lower oil prices…
…which helped to contain inflation at low levels…
…and also strenghtened the domestic financial position.Recovery is supported by stronger fiscal performance……, enhanced resilience through higher international reserves...
...and narower current account deficit.This placed thepublic debt to GDP ratio on adownward path , sooner than expected.
HONDURAS
11. During 2015 and the first nine months of 2016, economic policies responded to falling
inflation, financial sector stability priorities and laid the framework for inclusive growth.
On monetary policy, the BCH commenced in 2015 a gradual easing of the policy stance,
reducing the policy rate by 75 basis points (bp) to 6.25 by end-December. In March 2016, it
continued the easing path, with a 50 bp reduction to 5.75 percent, and a further 25 bp cut in June,
on account of lower headline inflation. At the same time, by August 2016 the BCH depreciated the
Lempira by 4 percent on an annual basis against the US dollar, broadly in line with the program. In
September 2016, in an attempt to absorb excess domestic liquidity, the Central bank also increased
the reserve requirement for banks.
On the financial sector, to maintain public confidence in the banking system the CNBS
liquidated Banco Continental and paid out depositors after it was listed by the U.S. Treasury under
the Kingpin Act. Overall, the impact on real activity was insignificant. Following this event, the CNBS
has also moved swiftly to propose new regulations to reform the bank resolution framework, and
strengthen its AML/CFT procedures.
On fiscal policy, in April 2016 the authorities enacted the FRL to serve as an anchor for fiscal
policy. The law places a cap on the size of the overall deficit (as a share of GDP) and imposes limits
to the increase in current spending. It also introduces ambitious measures to control, quantify and
disseminate the size and impacts of the generous amount of tax expenditures.4 The 2017 budget
was prepared in line with program commitments prioritizing social spending and includes an
infrastructure stimulus package to boost employment and competitiveness alongside a medium
term fiscal-framework.
On structural policies, in March 2016, the government launched a new medium-term
economic development strategy – Honduras 2020—to tackle high unemployment and promote
more inclusive growth. This program would guide national economic development over the next five
years and aims to create 600 thousand new formal jobs (20 percent increase in formal employment)
and increase exports by 20 percent.5 To achieve these objectives, the Honduras 2020 plan will focus
on expanding, with the help of FDI, the tourism, textiles, manufacturing of intermediate goods, back
office support and agro-industrial sectors.
OUTLOOK AND RISKS
12. The outlook for growth is broadly favorable, amid low inflation, steady credit growth
and an increase in net international reserves. Real output is projected to grow by 3.6 percent in
2016 (the same as in 2015), supported by scaled up public sector infrastructure investment (which
partly offsets a slowdown in the import-intensive private investment associated with the completion
of several solar electricity plants in 2015) and a supportive monetary policy stance. After the
significant fiscal over performance of 2015, and in line with the existing program and the FRL, the
4 The amount of tax expenditures in Honduras is estimated at 6½ percent of GDP, one of the largest in the region.
5 Many of these jobs would be the result of the formalization of workers currently in the informal labor market.
INTERNATIONAL MONETARY FUND
9
HONDURAS
nonfinancial public sector (NFPS) deficit is expected to
widen to 1.5 percent of GDP from 1.0 percent, to
accommodate planned investment in infrastructure.
Consistent with expanding real sector activity and
greater private sector confidence, credit to the private
sector is expected to grow by 10 percent (or about
2 percentage points of GDP), in line with a sustainable
pace of financial deepening, as judged by observed
trends in other low-income countries.6 Meanwhile, as
the negative output gap closes, combined with the
projected rise in international oil prices and electricity
tariffs, inflation risks may intensify. Against this
background, following the reduction of 25 bp in the
policy rates adopted last June, monetary policy is expected to remain vigilant.
Table 2. Honduras: Medium-Term Scenario
13. Over the medium-term, growth is expected to converge to its potential
(3.8 percent). The implementation of the FRL and the planned reforms to the monetary policy
framework and exchange rate regime could improve business confidence and private sector
6 This conclusion is based on the use of an excel-based toolkit to assess the likelihood and consistency between real
sector and financial sector forecasts based on historical patterns for low income countries. In the simulation for
Honduras, the real sector variables are conditioned by real private sector credit growth.
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-10-5051015GDP growth (%)Investment growth (%)Private consumption growth (%)Inflation (%)Employment growth (%)Distribution of macroeconomic outcomes (percent)
P25
P75
Baseline
P=percentile
Prel.20142015201620172018201920202021Output and InflationGDP at constant prices3.13.63.63.73.83.83.83.8CPI inflation (eop)5.82.44.04.54.54.54.54.5Public sectorNet Lending (balance)-3.9-1.0-1.2-1.5-1.2-1.0-1.0-1.0Net Lending minus net interest payments (Primary balance)-3.50.10.1-0.10.30.60.60.3Gross debt40.940.942.043.544.344.644.842.7External SectorCurrent account balance-7.4-6.3-5.9-5.7-5.7-5.5-5.2-4.9GIR (in months of non maquila imports) 1/4.34.54.74.74.84.95.15.3Sources: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections.1/ Refers to the following year's imports of nonmaquila goods and non-factor services.(Annual percent change)(In percent of GDP, unless otherwise stated) Proj.
HONDURAS
outlook. In addition, the planned expansion in the maquila sector—could be a fillip for job creation
and higher exports. The continued projected steady growth in the U.S. would continue to serve as
an important pull factor in Honduras’ growth performance going forward. From the supply side,
growth is likely to come from higher capital accumulation and broad-based gains in productivity as
a result of the government’s high priority infrastructure investment program, and policy reforms to
improve economy-wide efficiency, reduce transactions costs and promote regional integration.
Inflation is projected to increase slowly as oil prices rise, but remain in line with the central bank's
target. Growth in private credit is consistent with a sustainable pace of financial deepening, which
could support growth without causing financial sector instability. Over the medium term credit
growth is expected to come primarily from the agricultural, industrial and construction sectors as the
authorities move to improve the allocation of credit away from foreign currency credits, while
simultaneously promoting more credit to the productive sectors.
14. Risks are predominantly on the downside, because of global uncertainties and
potentially volatile domestic conditions (see RAM in Annex III).
External risks. A sharper-than-expected global growth slowdown could significantly reduce
growth, triggering a reversal in capital inflows and, given the crawling-peg regime, a reduction in
international reserves and/or a depreciation of the currency thus increasing credit risk from
unhedged FX borrowing. The Trans-Pacific Partnership (TPP) could also potentially challenge
Honduras competitive position, as significant tariff reductions in textiles would come into effect
immediately once the TPP is ratified.7 Withdrawal of correspondent banking relationships by foreign
banks may interrupt international financial flows, including remittances inflows.
Domestic risks. Failure to address problems of structural competitiveness, such as low
human capital as well as other impediments to doing business, including high crime and corruption,
and low physical capital and weak infrastructure would retard productivity gains and growth. Reform
fatigue, capacity constraints, sluggishness in obtaining faster job creation, and the thin
parliamentary majority of the current government could pose challenges to implementing key
reforms. Failure to maintain the course on fiscal prudence during a potentially charged electoral
cycle would undermine policy credibility and affect investor confidence and thus growth. Finally, in
the near term, a worsening of the Zika epidemic and adverse weather conditions, consequent on the
advance of “El Niño” phenomenon, could impact labor supply and production and through this,
short-term growth.
15. The authorities broadly concurred with the outlook and risks. The authorities’ median
growth forecast is 3.6 percent in 2016, with slower-than-expected investment growth being the
main risk. The authorities have not yet quantified the impact of the Honduras 2020 strategy on
growth over the medium term, but expect to raise it to 4 percent, supported by a recovery in
commodity exports, the planned implementation of the large investment projects in energy and
7 A number of factors could lessen the impact of TPP on the textile sector, including tariff phase-out periods for some
of Honduras key exports products, and the country’s geographic proximity to the U.S. market. See Annex IV on the
potential effects of the TPP on Honduras.
INTERNATIONAL MONETARY FUND 11
HONDURAS
infrastructure and ongoing negotiations for FDI in textiles, manufacturing and tourism. The
authorities are, however, concerned about capacity constraints of the government, which could
delay reform implementation.
PROGRAM PERFORMANCE AND PAST FUND ADVICE
16. The SBA needs to be rephased. Given the increase in Honduras’ quota under the
Fourteenth General Review of Quotas, the SBA needs to be rephased to take into account the
increase in Honduras’ first credit tranche. As a result of its quota increase, Honduras’ first credit
tranche has increased to SDR62.450 million from SDR32.3750 million. The remaining
SDR15.250million (of the original SBA of SDR77.70 million) has been equally distributed over four
reviews (Table 16).
17. Program performance remains satisfactory. The third review under the SCF will be
governed by end-December 2015 PCs, while the third review under the SBA will be governed by
end-June 2016 PCs. At the same time, the fourth review under the SCF and the SBA will be governed
by end-June 2016 PCs.
18. The authorities have met most of the performance criteria and all of the indicative
targets for end-December 2015. The over performance of the fiscal targets was sizeable. The
authorities also observed the performance criteria of net lending by public pension funds and public
debt, along with the indicative fiscal targets. That said, the NDA target was missed by a small
margin. Staff also supports the authorities’ request for a waiver of the end-December 2015 PC on
the ceiling of the stock of NDA as the deviation was corrected by end-June 2016 and does not affect
the successful implementation of the program.
19. The authorities have met most of the end-June 2016 targets. In particular, the monetary
targets on the NDA and NIR were met with comfortable margins. On the fiscal targets, the overall
balance for the nonfinancial public sector, the central government and the ENEE were all met with
wide margins. This was also the case for the indicative targets. However, the performance criterion
on net lending from the public pension funds was missed by a wide margin. The net lending PC was
missed due to the implementation of a subsidized lending program for teachers (as part of a wider
package of measures announced in June) from the teachers’ pension fund that substantially raised
loan demand. This program sought to consolidate/refinance obligations of its affiliates with private
financial institutions (banks and cooperatives). The low interest rate offered by this program relative
to private institutions has been creating a massive demand for these loans which resulted in net
lending well above the program’s ceiling (L2.4 billion compared to a target of L0.2 billion). The
authorities also failed to observe the end-June 2016, performance criterion on the accumulation of
new arrears by ENEE. This temporary increase in domestic arrears occurred as ENEE transited to a
new management team in the first half of 2016. Staff supports the authorities’ request for a waiver
on the end-June 2016 PC on the ceiling on net lending from public pension funds and also of the
end-June PC (ceiling) on accumulation of new arrears by ENEE, as they are implementing strong
corrective measures so that these non-observances do not affect the successful implementation of
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INTERNATIONAL MONETARY FUND
HONDURAS
the program. Additionally, considering revised projections, staff supports the request for modification
of the end-December 2016, PCs on NDA and the present value of net external debt contracted.
20. Two structural benchmarks for end-September 2016 are proposed for modification.
The structural benchmark on public sector domestic arrears is proposed to be moved from
end-June 2016 to end-December 2016. This was necessary, as the ongoing audit to verify these
arrears is behind schedule owing to delays in the operation of the audit firm.
The structural benchmark on the approval by congress of a law to reform the social security
institute (IHSS) is proposed to be moved from end-December 2015 to end-December 2016 as the
authorities prioritized the passing of the FRL during the first-half of 2016. The authorities however
remain committed to enact an IHSS law consistent with the program fiscal targets.
Box 2. Response to 2014 Article IV Consultation’s Key Recommendations
In December 2014, the authorities’ program included several components of staff’s advice
contained in the 2014 Article IV consultation.
Apply fiscal consolidation measures—relying more on lower expenditures and a cut in
electricity losses. The authorities have implemented fiscal consolidation measures, which have
put the public finances on a firmer footing.
Adopt a more flexible exchange rate regime over the medium-term. The central bank is
preparing a plan to eliminate the surrender requirements for foreign exchange and allow for
greater exchange rate flexibility over the medium-term.
Modernize the monetary policy framework. The authorities are preparing a plan to modernize
the monetary policy framework that would form the basis for increased exchange rate flexibility.
Implement measures to reduce currency mismatches by un-hedged borrowers. The
regulatory commission has implemented additional capital requirements for unhedged borrowers
in foreign currency.
Amend the public-private partnerships (PPPs) legislation in line with fund
recommendations. The PPP framework has been revamped to grant the ministry of finance a
leading role in the evaluation and approval of PPP projects. For such purpose, a special unit was
created in the ministry of finance and currently is providing mandatory assessments on the fiscal
risks involved in PPP projects. Sovereign guarantees for third parties operating PPP projects were
also repealed.
Reform the social security institute (IHSS). The authorities have sent to the congress the IHSS
draft law.
INTERNATIONAL MONETARY FUND 13
HONDURAS
PROGRAM REVIEW
A.
Building Stronger Fiscal Institutions to Reduce Fiscal Dominance
21. The 2016 fiscal program focuses on institutionalizing the hard-won gains, while
creating the fiscal space to finance high-quality infrastructure projects. Consistent with a higher
public investment spending on high priority infrastructure projects, the primary balance of the NFPS
is projected to widen by 0.3 percent of GDP. A floor equivalent to 2 percent of GDP has been
defined for social spending and an increase in this floor is projected for 2017 as the revenue
envelope expands.
22. The authorities have adopted a FRL to institutionalize the hard-won fiscal
consolidation, increase accountability, transparency and stability. The law sets out a medium-
term ceiling for the fiscal deficit (1 percent of GDP) and a transitional path to achieve it. The FRL also
seeks to reverse the current bias against public investment in the composition of public
spending. During the transition period, 2016–17, and consistent with the authorities’ economic
program, a deficit ceiling of 1.5 percentage points of GDP has been targeted. This target
accommodates an increase in public investment, which is also reflected in the medium-term fiscal
projections. The law also includes escape clauses for the cases of economic emergency or natural
disasters. A clear convergence path is also included to guide the return of fiscal aggregates to the
mandated parameters, if the escape causes are used. On transparency and accountability, the law
formalizes the introduction of the medium-term fiscal framework (MTFF) over the medium-term as
the main guideline for the evaluation of policy proposals. It also requires a formal assessment of the
central bank on the consistency of the MTFF with the monetary and exchange rate policies. In
September 2016, the authorities submitted to Congress the 2017 budget in accordance with the FRL.
23. The FRL should be a catalyst for additional fiscal reforms. Now that the FRL has become
the overarching framework that underpins fiscal policy, the authorities need to address the short
and medium-term challenges to its implementation. In the short term, the unity of the budget needs
to be restored by limiting the use of trust funds. Trust funds should operate under the budgetary
framework and their operations should be properly disclosed, recorded, and audited. Building a
track record of implementing such restrictions will be critical to assessing the commitment of the
authorities to the FRL, particularly during the upcoming electoral cycle, which customarily in
Honduras has been associated with the abandonment of fiscal discipline. Additionally, the
authorities need to ensure the consistency of the FRL with initiatives such as the Honduras 2020
plan. In sum, strengthening fiscal institutions is required to support an improved external debt risk
rating and keep public debt on a sustainable path over the medium term.
24. The new tax administration authority should protect the hard-won gains in tax
collection. With the assistance of the IADB, a new tax administration was created in February 2016,
(Servicio de Administración de Rentas, SAR) and is currently being staffed through a specialized firm.
During this transition process, tax collection, particularly for large taxpayers, is being supervised and
protected by a new unit in the SAR. Additionally, to strengthen compliance, the SAR has increased
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INTERNATIONAL MONETARY FUND
HONDURAS
the number of field inspections. It is expected that the SAR will be fully operational by March next
year.
25. The social protection framework law (SPL) should continue to be implemented
according to the fiscal program. So far the implementation of the SPL has been slow, owing to the
difficulties in expanding the cash-transfer program “Vida Mejor”. On expanding the health coverage,
however, the main challenge is to introduce a subsidized public insurance scheme. The plan is to
fund it with resources coming from the expiration of tax exemptions. 8
26. Additional reforms in the energy sector are required to strengthen ENEE’s finances and
foster competition in the electricity market. Over the last 2 years, ENEE’s financials have
improved considerably. In 2015 ENEE achieved a balance relative to the 2 percent of GDP deficit
obtained in 2013. Last June, the energy regulatory commission (CREE) introduced a new tariff
scheme based on cost recovery, which is in line with international best practices. During the first half
of 2016, ENEE increased its domestic arrears during the transition to a new management team. Thus
far, half of these additional arrears have been cleared and actions have been taken to clear the
remainder of arrears before end-December 2016. Reducing the nontechnical losses from the high
level of 33 percent (March 2016), however, is the main pending issue, which is expected to be
tackled once a new private operator assumes control of electricity distribution. With the rightsizing
process of ENEE basically concluded, next steps in the reform of the electricity market need to
prioritize the participation of private companies in distribution, transmission, and system operation
aiming at foster competition and reducing energy costs.
B. Modernizing Monetary and Exchange Rate Policy
27. Staff noted that the current supportive monetary policy stance was broadly
appropriate. Inflation has remained below the central bank’s 4.5 percent target, owing to a still
negative output gap and low fuel prices. At the same time, net international reserves have fallen
slightly after meeting program targets last June, but remain broadly on track to achieve the end-
December 2016 NIR target of US$3,005 million (4.7 months of imports). With the policy rate now
broadly in-line with the estimated neutral policy rate––staff cautioned against further easing in the
near term (see Box 3).
8 Health coverage remains low by regional and international standards (see SIP on Benchmarking Public Spending).
INTERNATIONAL MONETARY FUND 15
HONDURAS
Box 3. Estimates of the Neutral Interest Rate
For 2016, the range of estimates for the neutral policy interest rate fluctuates between
4.7 percent and 9.8 percent in nominal terms. Staff used several approaches to measure the
neutral interest rate: the uncovered interest rate parity; the small-monetary policy model; the
expected-inflation augmented Taylor rule; the consumption-based CAPM; and an H-P filter on ex-
post real interest rates (see Magud and Tsounta (2012)).1 In nominal terms, the current policy
interest rate of 5.5 percent falls within the neutral rate range. Going forward, however, the current
level could be on the low side if the slack vanishes quickly or if the rise in inflation, on account of
higher energy costs, turns out higher than expected. Given the range of estimates for the neutral
interest rate, staff considers the current monetary policy stance to be broadly appropriate. That
said, the central bank should stand ready to act should inflationary pressures emerge.
28. The central bank should stand ready to tighten monetary policy if the balance of risks
to inflation tilts to the upside. Upside risks include potentially rapid vanishing of the economic
slack coming from faster than programmed pace of economic recovery, cost pressures from planned
recovery of real electricity costs, the recent wage increase in the public sector, the dissipation of low
commodity price effects and faster growth in net domestic assets. At the same time, the uncertainty
associated with the US election and a softening of the U.S. growth call for increased vigilance given
Honduras’ close trade and remittances links with the U.S.
29. The authorities have decided to adopt inflation targeting as the monetary policy
framework. With the recent enactment of the FRL, an inflation targeting framework could give the
authorities the necessary tools to respond to external shocks. To facilitate this, the authorities plan
to start building domestic and foreign exchange interbank markets, and reform the central bank law
to give it a clear mandate to maintain price stability. This framework builds on reforms already
16
INTERNATIONAL MONETARY FUND
45.5Method Neutral Real Interest RateNeutral Nominal Interest RateNominal MonetaryNRIR)(NNIR)Policy Rate Gap (bps)New Keynesian Model 2/0.74.7-76.6Uncovered interest parity 3/5.89.8430.0Expected-Inflation Augmented Taylor Rule 4/0.84.8-67.7Consumption based CAPM 5/3.47.4188.6HP-Filter 6/2.56.597.7Average2.66.6114.4Source: IMF staff calculations1/Magud, N.E., and E.Tsounta (2012) . To Cut or Not to Cut? That is the (Central Bank's) Question IMF Working paper, 12/243, (Washington D.C.:International Monetary Fund).2/A rational expectations model based on four basic behavioural equations--aggregate demand, a short-term aggregate supply, the uncovered interest rate parity condition, and a monetary policy rule.3/This calculated as the sum of the US policy rate (.375%), the expected change in the nominal exchange rate (5 %)and EMBI spread (4.4 %) as a proxy for country risk.4/ This is calculated using the following equation: rn = f1*rn{-1} + (1-f1)*(rn_neutral + f2*(dot4_cpi{+4} - target{+4}) + f3*lgdp_gap) + e_rn;Target=4.5; f1=0.7;f2=2;f3=0.8;rn_1=5.75;rn_neutral=5;(dot4_cpi{+4}=3.59;lgdp_gap=-0.655/ This is calculated is based on the sum of the log of the discount factor plus the relative risk aversion, multiplied by the expected growth in percapita potential GDP, less the volatility of potential percapita growth : ln(r)=-ln(b)+vg-(1/2)v(1-e).6/ In this method, we run a standard Hodrick-Prescott (HP) filter to the nominal interest rate series from 2000Q1 to 2015Q4.Actual Monetary Policy rate as at June 2016Expected Inflation: December 2016
HONDURAS
undertaken to improve the monetary policy operational framework, including: i) better forecasting
of liquidity; (ii) upgrade of existing plans to develop the interbank market; (iii) increase the signaling
content of the monetary policy rate; (iv) better coordination on liquidity management with the
Ministry of Finance; and, (v) gradual phasing-out of banks’ use of government bonds to meet a
portion of reserve requirements.
30. Staff welcomes the authorities’ decision to increase exchange rate flexibility as this
would improve the monetary transmission mechanism and provide a shock absorber to
external shocks. Consistent with this commitment, the authorities would issue the necessary
regulations to establish a foreign exchange interbank market, and gradually relax the surrender
requirements on foreign exchange earnings during the program period. 9 A more flexible FX market
should also be supported by a code of conduct for market participants, transparent criteria for FX
transactions including reporting arrangements for FX dealers, strengthened guidelines for banks FX
exposures, enhanced reporting arrangements for authorized dealers and the elimination of the
system of commissions.
31. The institutional framework of the BCH needs to be strengthened in line with the 2015
safeguards assessment. An updated safeguards assessment, completed in April 2015, found that
the Central Bank Law poses significant risks to the bank’s autonomy and also does not provide for
sound governance arrangements. In addition, the assessment noted that the bank’s financial
reporting framework is not aligned with international standards. The implementation of safeguards
recommendations to address these risks has been slow, but the authorities plan to submit to
congress reforms to the Central Bank Law to align it with good international practices. The Central
Bank also plans to adopt International Financial Reporting Standards from FY2017.
32. The success of monetary reform would depend on the continuation of de-dollarization.
Since 2014 an improved policy mix and favorable external conditions have facilitated a rapid re-
monetization and a slow de-dollarization process in Honduras. From a monetary policy perspective,
de-dollarization could facilitate a stronger transmission of policy rate adjustments to domestic asset
prices. In particular, lower liability dollarization and higher lending in domestic currency could
improve the credit channel for the transmission of monetary policy. It could also help to reduce the
pass-through from exchange rate changes to inflation. In sum, a continuous process of de-
dollarization would reduce vulnerability of the overall economy to episodes of larger exchange rate
volatility. Against, this background the authorities are encouraged to remain steadfast in their
9 Staff have identified two exchange measures subject to Fund approval under Article VIII, Section 3 in
Honduras. These arise from the lack of a mechanism to prevent potential spreads in excess of 2 percent emerging
(i) between successful bids within the BCH’s foreign exchange auction; and (ii) between the official exchange rate
(TCR) of the day and the exchange rates at which foreign exchange is sold at the auction on that day, giving rise to
multiple currency practices. In practice the allocation (adjudication) of foreign exchange in the foreign exchange
auction has been given to a single price. The authorities have requested temporary approval of these measures,
which are maintained for non-balance of payments reasons. Staff supports this request as they do not materially
impede Honduras’s balance of payments adjustment, do not harm the interests of other members and do not
discriminate between Fund members. Staff additionally note that the authorities’ planned reform to the monetary
policy framework should ultimately eliminate these measures.
INTERNATIONAL MONETARY FUND 17
HONDURAS
implementation of higher capital requirements for foreign currency borrowing by unhedged
borrowers.
C.
Creating a More Resilient Financial Sector
33. A moderately concentrated banking sector dominates the financial system. In 2015, the
financial system contained 15 private banks, where total bank assets represent 97 percent of GDP and
77 percent of total assets of the financial system. In a process driven by a series of mergers and
acquisitions to reduce costs and improve efficiencies, the banking system has become more
consolidated over time. Most banks are part of economic holding companies which typically include
other financial services such as an insurance company and other non-financial companies with
increasingly stronger cross-border links and exposures. Given the need to mitigate potential
contagion risks the staff advised to strengthen the cross border and consolidated regulatory and
supervisory practices.
34. Since 2014, banking system credit to the private sector has been expanding at a pace
well below credit boom metrics, but current sectoral allocation may exacerbate
vulnerabilities. Credit has expanded at about 1 percentage point of GDP per year since 2014, much
lower than the credit boom threshold of 5 percentage points of GDP. Meanwhile the sectoral
allocation of the loan portfolio at end-2015 is well diversified, with about 60 percent of loans
comprising consumption, real estate and corporate sectors, and the loan-portfolio exposure to
households continues to grow at a steady pace of 12.8 percent per year.
35. The high level of un-hedged borrowers in foreign currency across some sectors
remains a source of concern. The loan-portfolio exposure to foreign exchange risks remains high.
In 2015, the share of foreign currency loans to unhedged borrowers in the corporate and real estate
sectors stood at 46 and 80 percent, respectively. This increases the vulnerability of the financial
sector to foreign exchange rate risks, and requires sustained efforts from the bank supervisory body
to mitigate it.
36. The banking system’s high lending spreads are restricting credit intermediation.
Although falling somewhat, bank lending spreads, at 10.2 percent in 2015, remain high.10 Overhead
costs, which at 40 percent of income are high by regional standards, are a key driver of high spreads.
Other elements explaining high spreads are the high reserve requirements and banks’ business
model of placing a large share of resources (16 percent of total bank assets) at the central bank.11
High spreads can lead to high profits, and thus to capital. More frequently, however, high spreads
increase intermediation costs and restrict overall credit growth. Given the importance of bank credit
in Honduras, a restricted credit intermediation is likely to lower investment and saving, and through
10 During 2011-2015 ex post spreads have averaged 10.6 percent. In 2011, they were 11.4 percent, but has gradually
inched lower each year.
11 A recent study on net interest margins suggests that operating costs are the most important determinant of banks’
interest margins. Other key determinants are high provisions for nonperforming loans and high liquidity ratios, see
Koffie Ben Nassar, Edder Martinez, Anabel Pineda” Determinants of Banks' Net Interest Margins in Honduras” IMF
Working Papers, WP/14/163, 2014.
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these channels output growth. To improve credit intermediation, the authorities would need to
implement measures to reduce costs in the financial system. These measures could include
procedures for minimizing the cost of credit information, legal reforms to facilitate easier recoveries
and lower reserve requirements. Much smaller spreads would improve credit intermediation and
through this, the monetary policy transmission mechanism.
37. Stress tests reveal that the banking sector is broadly resilient to most shocks. Stress
tests conducted by staff confirm the banking sector’s relative strength in managing market and
liquidity risks, which may arise from a reduction in correspondent banking relationships (see Table
3). Specifically, the system can tolerate shocks such as, deposit withdrawals, and a large depreciation
of the currency, suggesting that, liquidity and foreign exchange risks are contained.12 The system is
also able to absorb a widespread increase in NPLs. Note that, when confronted with tail-risk
scenarios originating from slower global growth in advanced economies plus tighter financial
conditions, the system does not appear to have sufficient capital buffers to fully absorb such shocks.
The tail risk scenarios could manifest itself as: i) a credit concentration shock where the three largest
borrowers default, or ii) a combination (multiple) shock. In both scenarios, the banking system’s CAR
is likely to be substantially impacted. That said, rollover risks associated with foreign funding remain
manageable even under scenarios of extreme stress in international banking systems. In particular, a
10 percent shock to US banks would reduce credit in Honduras by only 1.3 percent of GDP.13
38. In light of the stress test results, the mission advised the authorities to closely monitor
developments in the following areas:
Concentration risks. Given that the default of the three largest borrowers of each bank
would impact the banking system’s capital, there is a need to strengthen monitoring and ensure
strict compliance with regulations to avoid risks posed by credit concentration.
High dollarization. About 30 percent of deposits and 33 percent of loans are denominated
in USD. Credit dollarization has decreased recently, in part owing to stronger enforcing of prudential
regulations such as: limits on net open position in foreign currency; requirements that foreign
exchange loans be granted to borrowers with foreign currency earnings; and stronger limits to the
loan-to-deposit ratio in foreign exchange. In particular, since mid-2015, the authorities have
adjusted the risk-weighted capital asset ratios to 150 percent for mortgage loans, where debt-to-
collateral ratio exceeds 85 percent, and to 175 percent for consumer loans (including credit cards).
Household debt. Total household indebtedness as a share of GDP reached 19 percent in
2015 from 15.0 percent in 2011. In this category, credit card debt has grown to about 25 percent of
12 All shocks, except for the liquidity and interest rate shocks, are calibrated as two standard deviations over the
mean for the period 1997 to 2015. The liquidity shock is equivalent to the maximum one-month deposit withdrawal
faced by individual banks during 2000–08, as stated in the 2009 FSAP report, SM/09/93. On interest rate, staff
simulated a 3.3 percentage points increase in the nominal policy interest rate (similar to the one-year cumulative
change during December 2008 to December 2009).
13 For instance, the total impact on foreign credit availability in Honduras from a 10 percent shock to asset values of
BIS reporting banks is about 3.3 percent of GDP (see SIP, Banking Sector Stability in Honduras).
INTERNATIONAL MONETARY FUND 19
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total household debt (or 5 percent of GDP). At the same time, non-performing credit card and
housing debt is increasing, following a trend decline from the spike of the global financial crisis in
2009. Against this background, to mitigate vulnerabilities in this area, the authorities have agreed to
adopt regulations to keep household indebtedness within prudent margins and increase financial
literacy programs.
Reduction in correspondent banks relationships. Although the Honduran authorities do
not, currently, see this as a source of concern, they should continue to work to prevent this
becoming an issue, or stand ready to act if the risk does materialize. In any case, given that
Honduran banks operate in jurisdictions that are affected by a reduction in correspondent banking
relationships, the parent banks in Honduras could be indirectly impacted.
Table 3. Summary of The Combination Scenario Stress Test
39. The authorities have embarked on a comprehensive reform of the framework for bank
resolution, comprising extensive legal amendments and a significant strengthening of the
authorities’ capacity for dealing with financial sector distress. This reform is a significant step
forward, in light of the weaknesses which became apparent during the liquidation of Banco
Continental in the fall of 2015. The broad objective of this reform is to establish a robust framework
that allows for the resolution of banks, while preventing systemic disruption and the exposure of
taxpayers to losses. Notably, the reform encompasses legal underpinnings for the scope, objectives,
institutional arrangements, powers and tools for resolution and revisions to the liquidation regime.
40. Further reforms should aim to strengthen the AML/CFT framework. In light of the
weaknesses which became apparent in the context of the liquidation of Banco Continental in the fall
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IndicatorRatings 1/Summary of ResultsSolvencyPre-shock CAR14.0213.614.6Impact of (percentage points of the original RWA)-7.8-7.9-7.8Increase in provisioning-0.42-0.1-1.0Increase in NPLs-3.52-3.3-3.8Increase in interest rates-3.4-3.9-2.6Exchange rate change (+ depreciation, - appreciation)-0.52-0.5-0.4Post-shock CAR6.245.76.7LiquidityLiquid assets/total assetsPre-shock24.6228.421.9Post-shock17.3319.713.8Liquid assets/short-term liabilitiesPre-shock69.5174.162.6Post-shock56.1262.646.0Overall Rating Pre-Shock Rating2 Post Shock Rating3Change from pre-shock rating1Source: IMF staff calculations1/Post-shock CAR (if profits used for defence)1/ 1=Low risk, 2=increased risk, 3=High risk, 4=Very high risk.All BanksDomestic BanksForeign Banks
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of 2015, stepping-up AML/CFT supervision of the banking sector and effectively implementing fit
and proper requirements for beneficial ownership and control of financial institutions would be a
significant step forward.
D. Other Program Issues
41. The program remains fully financed. All financing needs are covered for the next
12 months based on external and domestic operations. The authorities have successfully re-profiled
about US$400 million in 2015, extending the average maturity of domestic debt from 3.3 to
4.3 years. The domestic financial system, especially pension funds, currently possess ample liquidity
to support the financing plans. The authorities remain open to the possibility of tapping international
capital markets to undertake liability management operations to smooth debt service. Their extended
investment plan will require about US$750 million for 2016–17 in external financing which they plan
to obtain mainly from multilateral institutions, with most new debt contracted to be allocated to
infrastructure and social spending (Table 4).
Table 4. Summary Table of Projected External Borrowing Program
Sources: Ministry of Finance, Honduras
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USD millionPercentUSD millionPercentBy sources of debt financing299.8100236.9100Concessional debt, of which 68.02312.65Multilateral debt68.02312.65Bilateral debt0.000.00Other0.000.00Non-concessional debt, of which231.877224.395Semi-concessional37.41229.913Commercial terms194.465194.482By Creditor Type299.8100236.9100Multilateral292.498231.798Bilateral - Paris Club0.000.00Bilateral - Non-Paris Club0.000.00Other7.425.22Uses of debt financing299.8100236.9100Infrastructure132.444108.046Social Spending77.42652.422Budget Financing30.01024.710Other60.020.051.821.9Memo ItemsIndicative projectionsYear 2350.5254.8PPG external debtVolume of new debt in 2016PV of new debt in 2016 (program purposes)
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42. Capacity to repay the fund remains adequate and the balance of risks is manageable.
Honduras’ capacity to repay the Fund remains adequate. Potential access under the program would
have only a modest effect on external debt (29 percent of GDP at end-2015), and the risk of debt
distress is considered moderate according to the latest debt sustainability analysis.
43. The debt sustainability analysis shows improved prospects relative to the previous
review (Annex I). The medium-term fiscal projections show a declining path in the public debt over
GDP ratio, a significant improvement relative to the recent past. These projections are consistent
with the parameters of the FRL and reflect the stronger macroeconomic policies underpinned by
structural reforms that have been adopted. While the risk of external debt distress remains as
moderate, proper implementation of fiscal and monetary reforms will be key to move the risk
assessment to a low distress rating. The authorities broadly agreed with this assessment.
MAIN THEMES OF THE ARTICLE IV POLICY
DISCUSSIONS
A.
Increasing Inclusive Growth and Reducing Crime and Violence
44. Progress on inclusive growth reforms have been good and are set to continue. Staff
analysis shows that while some measures needed to improve the fiscal situation have been
regressive, such as the increase in the VAT rate, the authorities were effective in redistributing
additional resources through direct transfers such as the program Vida Mejor. The joint effect of the
two measures alone had a small but negative effect on aggregate output. However, fiscal
stabilization also brought macroeconomic stability and lower interest rates, which translated into
new business opportunities, especially in the rural sector, thus boosting GDP and decreasing poverty
and inequality further. As a result, staff estimates that the economic reforms implemented over the
last two years have helped to reduce poverty and income inequality. To lower poverty and inequality
further, structural reforms on the labor market to improve labor mobility across sectors will be key
(Box 5).
45. Growth-enhancing reforms can break the vicious cycle of high crime and low growth.
Macroeconomic simulations done by staff using a structural model calibrated to Honduras data, in
which economic performance, the crime rate and the decision to become a criminal are
endogenous, reveal that higher growth is associated with lower crime. In particular, over the
medium term a one percent increase in economic growth could reduce the crime rate by about one
percent. This leads to a virtuous cycle, where, as growth increases employment opportunities
increase and there is less incentive to become a criminal. Lower crime reduces the perception of
high crime, and this encourages productive economic activity, generating more employment
opportunities. Higher growth also provides more resources to fight crime and violence. And as
Honduras recent experience shows, a combination of increased economic activity supported by
enhanced anti-crime strategies has reduced the homicide rate by more than 30 percent in three
years. To sustainably reduce the still high crime rates further, the authorities will need to focus on
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crime prevention measures, including by mobilizing the AML/CFT framework to assist in detecting,
prosecuting and recovering the proceeds of crime, as well as improving labor mobility to make job
creation more attractive and accessible and further strengthening anti-corruption efforts.
46. Once fully articulated within the overall macroeconomic framework, the Honduras
2020 investment plan could help to generate sustainable output growth. The Honduras 2020
plan, launched last April, aims to create 600 thousand jobs and increase exports by 20 percent in five
years, but it has not yet been included in the macroeconomic framework amid a lack of details to
facilitate a full assessment. If implemented, this plan could have significant implications for
Honduras over the medium term, and therefore it is important for the authorities to carefully
consider the requirements for its success, the resource needs and the relevant changes that are
needed in other public policies. Additionally, it is critical to ensure the consistency of the reduction
in tax exemptions envisaged in the FRL and in the Social Protection Law (SPL) with potential fiscal
measures included in the Honduras 2020 plan.
47. Authorities’ views. The authorities broadly agreed with staff’s overall assessment of
inclusive growth. They noted that the macroeconomic adjustment program had freed-up resources
for the social program Vida Mejor to tackle poverty and any fall-out from the economic stabilization
program. It also provided resources for increased spending on citizen security, particularly in
vulnerable and at-risk-neighborhoods. The authorities noted the program to overhaul the national
police as an initiative to address deep rooted corruption issues. These reforms along with the steady
improvement in economic growth would help to further reduce criminal activity and poverty. The
authorities acknowledged the need to assess the macroeconomic implications of the Honduras 2020
plan and its coherence with other public policies. At present the plan is being implemented with a
high level of coordination with the private sector. For its part, the government is looking to invest
more in education and affordable housing over the medium term in support of this initiative.
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Box 4. Fiscal Reforms in Honduras: A Foundation for Inclusive Growth
The fiscal adjustment has restored macro stability, reduced sovereign spreads, and provided
resources for expanding social programs. After a long tradition of fiscal excesses, the government
embarked on a path to restore sound public finances. Over the last 2½ years the CPS deficit has been
reduced by 6½ percentage points of GDP. This result has been achieved by a combination of spending
and revenue measures, including a VAT tax reform. Since VAT increases are potentially regressive, the
government also decided to allocate some of the additional revenues to expanding their targeted cash
transfers program. Improved public finances and other reforms have reduced economic uncertainties,
as reflected in the more than 400 basis points reduction in sovereign spreads.
To understand the expected impact of the fiscal reform on output, poverty and inequality, staff
developed a general equilibrium model tailored to key characteristics of the Honduran economy.
The model reproduces qualitatively and quantitatively key macroeconomic and distributional features of
Honduras household level data. Drawing on Honduras household expenditure survey, the baseline year
in the model captures the size of the agricultural (13%), services (40%) and manufacturing (20%) sectors
as fractions to GDP. It also captures the effective collection of VAT, personal income, and other taxes as
fractions of total government revenues. To match these characteristics, the differences in total factor
productivity across sectors in the economy, as well as the sector specific parameters of the production
functions, and implicit tax rates are calibrated. The model simulates thousands of individual households
with diverse incomes, thus producing insights into income, wealth, and consumption distributions. The
persistence and variance of the households’ particular income shocks are calibrated to reproduce
measures of inequality (GINI of 0.55) and poverty (rates of about 60%) observed in Honduras’
household surveys. In addition, the model is calibrated to match households’ consumption patterns
with the objective of capturing the distributional implications of the policy changes.
The analysis reveals a positive impact of the reform on macroeconomic fundamentals. On its own,
an increase in VAT is potentially regressive and may depress aggregate demand and worsen poverty
and inequality. However, if the reform is combined with compensatory measures such as cash transfers,
private consumption expands and poverty is reduced. Cash transfers are assumed to have modest
positive impact (1%) on the productivity of households that receive them. These households tend to
have a large marginal propensity to consume, which boosts private consumption. The boost in private
consumption is not enough to compensate for the depressing effect on overall aggregate demand that
results from the taxes in isolation. However, once we also incorporate a decrease in the marginal cost of
capital (due to macroeconomic stability) private investment substantially increases, creating a virtuous
cycle that translates into higher GDP (2%), private consumption (1.5%), and private investment (9%),
which improve household’s incomes and bring additional tax revenues to finance cash transfers. Urban
poverty and inequality fall by more than two percentage points. These results are enhanced with a more
efficient and competitive financial sector. Productivity growth in the agricultural sector, combined with
targeted training could increase labor mobility and further enhance overall gains from the reform.
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Box 4. Fiscal Reforms in Honduras: A Foundation for Inclusive Growth (concluded)
Fiscal Reform Scenarios
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Increasing Public Expenditure Efficiency and Improving Energy
B.
Infrastructure
48. Increased efficiency of public spending can free-up resources for additional growth
enhancing public programs. Given the constraints on spending imposed by the FRL and the
already high tax effort, additional resources for priority spending over the medium term will depend
on efficiency gains in public spending (Box 6). Preliminary estimates by staff show that the potential
efficiency gains in spending on health and education can be substantial. A large proportion of these
efficiency gains in spending on education can be derived from rightsizing the wage bill. Against this
backdrop, staff urged the authorities to take a comprehensive look at public spending with a view to
adopting measures to increase efficiency in public spending, particularly in these two areas.
49. Another key priority over the medium term is to streamline tax expenditures. At
6½ percent of GDP, Honduras has one of the largest levels of tax expenditures in the region. This
situation was compounded recently with the granting of concessions (total removal) from VAT to
the agricultural sector (0.3 percent of GDP). Clearly, some of these tax expenditures have been
ineffective in helping to foster inclusive growth and reduce poverty. On the contrary, they foster
INTERNATIONAL MONETARY FUND 25
-6-4-20246810GDPCIGMacroeconomic Impact 3-5 years(percentage points deviations from steady state, cummulative)Higher VAT + Cash Transfers
-3.0-2.5-2.0-1.5-1.0-0.50.00.5Urban GiniRural GiniAggregateGiniUrbanPovertyRuralPovertyAggregatePoveryPoverty and Inequality impact 3-5 years(percentage points deviations from steady state, cummulative)
-6-4-20246810GDPCIGMacroeconomic Impact 3-5 years(percentage points deviations from steady state, cummulative)VAT + Cash Transfers + Lower Risk Premia
-3.0-2.5-2.0-1.5-1.0-0.50.00.5Urban GiniRural GiniAggregateGiniUrbanPovertyRuralPovertyAggregatePoveryPoverty and Inequality impact 3-5 years(percentage points deviations from steady state, cummulative)
HONDURAS
rent-seeking behavior in powerful interest groups. The authorities have already committed to
gradually eliminate tax exemptions to finance the implementation of the social protection law. In
addition, the FRL makes provisions to modernize tax expenditure management by administering tax
incentives and improving the control of beneficiaries.
50. Further reforms in the electricity market in line with the 2014 energy framework law
would be crucial for raising medium-term potential growth. The 2014 law aims to promote a
more efficient and transparent electricity sector and encourage additional private sector participation
in transmission and distribution of electricity. Against this backdrop, as a first step in the process, the
electricity energy regulatory commission (CREE) have established a new tariff scheme based on the
cost recovery, and plan to issue new regulations to improve the functioning of the electricity market.
51. Authorities’ views. The authorities noted the issues raised by staff on the efficiency of
public spending. They are planning to do a comprehensive study of the different compensation
schemes existing in the education and health sectors by benchmarking them against other public
employees and private sector comparators. Apart from this, they are also working on improving
efficiency in other areas. On the electricity reform, they acknowledged that reforms had been slower
than originally anticipated, but they are aware of the need to get the reforms in the sector right and
are pressing ahead with this endeavor.
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Box 5. The Efficiency of Social Spending in Honduras
The new fiscal framework creates a need for increasing the efficiency of public spending. The
fiscal responsibility law sets out an ambitious fiscal consolidation path. Additionally, the authorities
have implemented 2½ percent of GDP in tax measures leaving limited room for more gains. However,
with 65 percent of the population living in poverty, Honduras still has a pressing need to expand public
social services. Increasing the efficiency of public spending is the way to provide more services in a
consolidation scenario.
Benchmarking techniques could be used to measure the efficiency of public spending.
Benchmarking is the comparison of the performance of one unit against others. It is intimately related
to the concept of efficiency. In the benchmarking literature, once a model based on inputs and outputs
is defined, the efficiency is measured by identifying the best performing units and use them to build an
efficiency frontier. The performance of all units is assessed relative to that efficiency frontier. For this
exercise, we estimate frontiers for health and education spending using a sample of emerging and low
income countries then we estimate individual efficiency scores.
Efficiency scores can be calculated based on output-oriented or input-oriented models. In input-
oriented models, the scores are the proportional amount by which input consumption could be
reduced while leaving outputs unchanged. Scores from output-oriented models are defined as the
proportional amount by which outputs could be increased while leaving inputs consumption
unchanged.
Based on the estimated scores, we found there is ample room for the generation of savings,
particularly in health and education spending. For health, we use health-adjusted life expectancy
(HALE) as output, public spending, private spending and the educational level of adults as inputs. For
education, we use net enrollment rates as output and public spending and the teacher-pupil ratio as
inputs. In health, we found an input-oriented score of 0.955 showing limited room for getting better
outcomes by using inputs efficiently, however, the output-oriented score is 0.840 meaning that all
inputs could be reduced by around 15 percent without a reduction in the output. In education,
Honduras performed poorly in secondary education (input-oriented score 0.208) ranking last among
88 countries in the sample and 66/88 in the output-oriented measure (0.522). The results are better in
primary education with scores of 0.307 for the input-oriented and 0.948 for the output-oriented
measure. These results imply potential efficiency savings in educational inputs between 70–80 percent.
Tackling inefficiencies requires structural reforms aimed at introducing a performance culture in
the delivery of social services. In both sectors, the priority is to tackle the discrepancies between
compensation and productivity. The wage bill represents 80 percent of the education budget and
60 percent of that for health; therefore, there is no way to achieve savings without reforming the
compensation policies. The main problem is fragmentation, which is not a result of performance-based
evaluations but of the negotiations with powerful interest groups. In education, the priority should be
reforming the teachers’ estatuto and implementing the quality evaluations stated in the law. The health
sector has six of the eight existing compensation frameworks. These frameworks should be revised in
light of the need to expand coverage as stated in the law of social protection.
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HONDURAS
C.
Financial Development
52. Financial development is progressing steadily, but should be balanced with the need
to maintain financial stability. Financial development in Honduras, as measured by financial
deepening and inclusion indicators, is broadly in line with its peers in the region (Table 5). At the
same time, the rise in household debt and credit card debt in particular, underscores the need to
balance the desire for financial deepening and inclusion with the requirements of financial stability.
The recent growth in credit card use is thought to have permitted financial access to certain groups
that would not otherwise have access to financial services, but has now come to represent a key
vulnerability for the household sector given the rise in household credit card debt. In this context,
additional efforts at financial literacy need to be pursued.
53. Recent initiatives on advancing financial inclusion are welcome. The national financial
inclusion strategy has focused on access, prudential standards, education and consumer protection.
In line with this, there have been advances in retail e-payments system, especially for the receipt of
remittances, helping to broaden access. On the regulatory side, regulations covering payments and
the operation of electronic money by non-bank institutions have been recently adopted. That said,
there is a strong need to adopt regulation to govern mobile financial services and also increase the
provision of banking and payment services, particularly in the rural areas and to lower income
groups.
54. Financial sector development initiatives need to be broadened to include the role of
capital markets. The development of capital market in Honduras would provide a mechanism for
long-term financing and risk sharing. This is especially relevant for Honduras given the existence of
pension funds with large financial surpluses and limited investment options, and the banking
sector’s preference for holding central bank bills, financing consumption and other short-term loans.
The development of a wider range of long-term financial instruments could permit issuers to match
their funding needs with the investment guidelines of investors like pension funds and insurers. It
could also facilitate a reduction in the net foreign currency exposure.
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Table 5. Central America: Selected Indicators of Financial Development
HONDURAS
Sources: IMF International Financial Statistics (IFS); The Global Financial Inclusion (Global Findex) Database (FIN); Bank for International
Settlements (BIS); Bankscope (BKSC); World Development Indicators (WDI); Remittance Prices Worldwide database (RPW).
55. The strong macroeconomic performance under the SCF/SBA-supported program has
laid the foundation for further financial market development. Building on the progress already
made in the reforming the money market infrastructure, the key priorities going forward should be
the development of the inter-bank money market, and repo market; government domestic securities
market; and the full development of the government yield curve. The development of the local
capital markets could also benefit from the introduction of changes in the legal framework to
strengthen financial disclosure requirements, the code of corporate governance, and the bankruptcy
framework.
56. Authorities’ views. The authorities broadly agreed with staff’s assessment of the financial
sector. In particular, they noted that the efficiency of the banking system is a key public policy
concern––where relatively high returns of the banking system and equally high administrative costs
exist side by side. A second area of concern is about the level of competition in the banking system,
along with the level of credit card indebtedness of households, and the potential risks that this
poses to the stability of the banking system. Against this backdrop, to further strengthen the
financial system, the authorities requested MCM to conduct a Financial Sector Stability Review
(FSSR). The authorities plan to use the findings of this TA to further strengthen regulatory and
supervisory practices, develop the financial sector market infrastructure, and improve financial
inclusion.
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SourceYearRegional Central America AverageHondurasCosta RicaDominican RepublicEl SalvadorGuatemalaNicaraguaPanamaBANKINGAccessAccounts Per Thousand Adults, Commercial Banks IMF20141019948132776681616402731360Number of Branches Per 100,000 Adults, Commercial BanksIMF2014192322111237823Percent of Adults with an Account at a Formal Institution (%)FIN201440306554354119Depth/SizeDomestic Bank Deposits / GDP (%)IFS20144149232240413377Private Credit / GDP (%)IFS20144755552542323186Financial Deepening IndexWDI20130.200.180.210.130.230.210.120.31Financial Inclusion IndexWDI20140.380.230.600.430.400.310.280.42Efficiency/Structure3 Bank Asset Concentration (%)BKSC20146648677556678562Cost to Income Ratio (%)BKSC20146066647253625252Net Interest Margin (%)BKSC2014774910683Non-Interest Income / Total income (%)BKSC20142324253010203024Overhead Costs / Total Assets (%)BKSC201445373452Return on Assets (%)BKSC201421121221Return on Equity (%)BKSC2014151281911182214Credit to Government and SOEs / GDP (%)IFS201444642825Lending-Deposit Spread (%)IFS2014910127-8125External positionConsolidated Foreign Claims of BIS-Reporting Banks / GDP (%)BIS20144112231227108194OTHERAverage Cost of Sending USD200 to Selected Country (%)RPW201455-64555
HONDURAS
STAFF APPRAISAL
57. Program performance remains good amid steadfast implementation, strong
ownership, and domestic support. The authorities met most performance criteria along with all
the indicative targets through end-December 2015 and end-June 2016. The authorities did not
observe the end-December 2015, PC on net domestic assets (NDA), the net lending PC for end-June
2016 and the PC of no accumulation of domestic arrears in ENEE, but has since adopted policy
measures to maintain the integrity of the program. The structural reform agenda is proceeding
steadily. That said, the SBA needs to rephased to take into account the increase in Honduras’s first
credit tranche as a result of the increase in Honduras’s quota under the Fourteenth General Review
of Quotas.
58. The economy continues to expand in 2016, and the outlook for the medium term
remains favorable, broadly in line with program projections. The improved policy mix under the
program is enabling a process of inclusive growth, greater coverage of the social safety net, and
better foundations for fiscal sustainability—including additional resources to improve citizens’
security. These achievements will anchor the strategy to obtain higher growth and better social
conditions over the medium-term.
59. The recent adoption of the FRL is welcome. The authorities are now focused on
operationalizing the provisions of the law and clarifying its implications for handling extra-
budgetary programs (trust funds). The FRL together with the medium-term fiscal framework (MTFF),
is expected to fundamentally change the governance of fiscal policy and set the tone for the
adoption of other macro policy reforms over the medium-term.
60. Over the medium-term the reduction in the public sector debt ratio expected from the
adoption of the FRL should be regarded as a minimum, since further gains from
improvements in efficiency are likely to be large. The FRL defines a fiscal anchor which aims to
strengthen the fiscal position by reducing public debt in the medium term. That said, a more
accelerated pace of debt reduction could be achieved, without harming short-term growth, if the
authorities were to implement additional efficiency-enhancing revenue and spending measures. On
the revenue side, the main task is streamlining the generous and ineffective system of tax
exemptions. The authorities’ plan, based on the non-renewal of such benefits, is welcome, but much
more can be achieved by actively rationalizing those that are already known to be ineffective. On the
spending side, increasing the efficiency of health and education spending is the main medium term
task. A key element on the spending side is to revise the compensation framework to align it with a
results-based approach.
61. The supportive monetary policy stance remains broadly appropriate in the near-term.
Nonetheless, the BCH should remain vigilant and be ready to tighten if inflation or credit growth
were to accelerate and there are signs of overheating. With the policy rate now broadly in-line with
the estimated neutral rate, coupled with the baseline projection showing a closing output gap, along
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with planned recovery of the real electricity costs––likely to stoke inflationary pressures—the BCH
should avoid further easing in the near term.
62. Staff supports the decision to move towards an inflation targeting framework to guide
monetary policy. This reform would give the authorities the tools to respond to external shocks.
The immediate priorities are to develop domestic and foreign exchange interbank markets, while
reforming the central bank law to give it a clear mandate to achieve price stability.
63. The decision to move towards a more flexible exchange rate regime is welcome.
Increased exchange rate flexibility would help to absorb external shocks and increase
macroeconomic resilience. With the adoption of the inflation targeting framework, the exchange
rate flexibility would have a central role in the adjustment to external shocks. To support this, it
would be important to issue the necessary regulations to establish an interbank foreign exchange
rate market, and start relaxing the surrender requirements on foreign exchange earnings. The move
towards a more flexible exchange rate regime will also need to be supported by a code of conduct
for market participants, transparent criteria for FX transactions including reporting arrangements for
FX dealers, strengthened guidelines for banks FX exposures, enhanced reporting arrangements for
authorized dealers and the elimination of the system of commissions.
64. Staff cautioned, however, that success of monetary reform would depend on the pace
of de-dollarization. Without a serious de-dollarization program, the adoption of a more flexible
exchange rate regime could lead to macroeconomic instability, given the central role of the
exchange rate in price and monetary stability. De-dollarization would improve the transmission of
monetary policy, by opening up the balance sheet, credit and interest rate channels.
65. The financial system appears resilient, but vulnerabilities within the system need to be
closely monitored. Staff analysis shows that the financial system is expanding credit below credit
boom metrics. Banks have ample liquidity and capital appears adequate. At the same time, tail risk
scenarios suggest that banks’ capital may not be adequate to absorb the resulting losses. In this
regard, it is important for the authorities to monitor closely credit concentration and buildup of
household debt.
66. Staff is encouraged by the progress made thus far in reforming the bank resolution
framework. The recent draft law submitted to congress substantially strengthens the authorities’
capacity for dealing with financial sector distress without systemic disruption, or exposing taxpayers
to losses. In particular, the reform encompasses legal underpinnings for the scope, objectives,
institutional arrangements, powers and tools for resolution and revisions to the liquidation regime.
67. Now that the economy has been stabilized, the authorities are encouraged to focus on
key medium-term priorities. In particular, the incidence of poverty, crime and violence needs to
fall more, infrastructure gaps, especially in energy, need to close and financial market access for
poor households, and the efficiency of public spending (especially in health and education) need to
improve, and the financial sector needs further development. With the adoption of the medium
INTERNATIONAL MONETARY FUND 31
HONDURAS
term fiscal policy framework and the FRL, along with the planned reforms to the monetary policy
framework, the government has a good platform to push ahead with its medium term reforms firmly
to achieve its targets for growth and employment while maintaining macroeconomic and financial
stability.
68. Consistent with the authorities’ strong commitment, program risks have subsided. The
macroeconomic performance continues to be favorable and the outlook remains positive, given the
domestic policy mix and the still positive external environment. Staff considers risks to the 2016
program as titled slightly to the downside both on the economic growth and the policy agenda. The
key external risks are a sharper than expected global growth slowdown. On the domestic front,
failure to address problems of structural competitiveness, along with an ill-defined Honduras 2020
plan could retard productivity gains and output growth. The authorities remain committed to rolling
out the provisions of the recently enacted FRL. They are also pressing ahead with the electricity
sector reform agenda albeit at a slow pace. These efforts would be supported by the authorities’
plan to adopt an inflation targeting framework for monetary policy and the recent bank resolution
framework submitted to Congress.
69. Staff supports the completion of the third and fourth reviews under the SBA and the
SCF arrangements. Staff also supports the authorities’ request for a waiver of the end-December
2015 PC on the ceiling of the stock of NDA as they have corrected the deviation by observing the
end-June 2016 target. In addition, on the basis of corrective policy measures taken, staff also
supports the authorities’ request for a waiver on the non-observance of the end-June PCs on net
lending by the public pension funds and on the arrears from ENEE. Staff additionally supports the
authorities’ request for a rephasing of the SBA.
70. Staff supports the authorities’ request for temporary approval of the exchange
measures identified above.
71. It is expected that the next Article IV Consultation with Honduras would take place on
the 24-month cycle, subject to the Decision on Consultation Cycles.
32
INTERNATIONAL MONETARY FUND
Figure 2. Honduras: Growth is Strengthening Amid Stable Macro Policies and Better
External Conditions
HONDURAS
The service sector led the recovery in activity…
The recent improvement in the terms of trade also helped
to sustain activity
With a negative output gap, although shrinking, inflation
has remained under control
and private investment led demand growth.
The recovery contributed to closing the output gap, but
potential growth remains subdued
The reduction in inflation was also influenced by a
decrease in gasoline prices that responded to the fall in
international oil prices.
Sources: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections.
INTERNATIONAL MONETARY FUND 33
-4-202468-4-202468 2008 2009 2010 2011 2012 2013 2014 2015
Primary sector
Commerce and services
Industry
Construction
Real GDP growthContributions to Growth by Sector(In percent)
-4-202468-4-202468201020112012201320142015
Private consumption
Private investment
Public sector outlay
Net exports
Real GDP growthContributions to Growth, Demand Components(In percent)
-3-2-1012345-10-8-6-4-202468101220082009201020112012201320142015
Terms of Trade (LHS)
Real GDP growthTerms of Trade and Growth(In percent)
-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%201020112012201320142015
K
L
Potential TFP Growth
Potential GrowthContributions to Potential Growth, Production Function(In percent)
-4-3-2-101201234567201020112012201320142015Output Gap and Inflation Measures(In percent)
Headline
Core
Output Gap (RHS)Errorbands correspond to the 90 percent confidence interval of output gap
-20-15-10-5051001234567201020112012201320142015Inflation(In percent, LHS) Domestic gasoline pricechange (in percent) (RHS)
HONDURAS
Figure 3. Honduras: The External Position Has Strengthened on The Back of Favorable
Terms of Trade Movements
Sources: Central Bank of Honduras and Fund staff estimates and projections.
34
INTERNATIONAL MONETARY FUND
-15-10-505101510111213141516171819201020112012201320142015Remittances
In percent of GDP (lhs)
yoy growth (rhs)
2345-112345201020112012201320142015Gross International Reserves
US$ billion (lhs)
Months of imports (rhs)
-30-20-1001020304050020406080201020112012201320142015Exports(In percent of GDP)
Coffee
Net maquila
Rest
Export volume (% change, rhs)
-100102030020406080100201020112012201320142015Imports(In percent of GDP)
Oil
Non oil non maquila
Import volume (% change, rhs)
Terms of Trade (% change)
012345678201020112012201320142015
FDI
EMBI SpreadCapital Inflows (In percentof GDP and ppt)
-12-9-6-3036201020112012201320142015Current Account(In percent of GDP)
Non oil current account
Current account
Figure 4. Honduras: Monetary Conditions Have Remained Favorable
HONDURAS
Sources: Central Bank of Honduras and Fund staff estimates and projections.
INTERNATIONAL MONETARY FUND 35
-55152535Apr-12Apr-13Apr-14Apr-15Apr-16Credit to the Private Sector (yoy growth)
Total
Lempiras
US$
0510152025303501020304050607080Apr-11Apr-12Apr-13Apr-14Apr-15Apr-16Banks' Net Position with BCH(Billions Lempiras)
Bank's net position with BCH
Stock of BCH paper (rhs)
-606121824300510152025Apr-12Apr-13Apr-14Apr-15Apr-16Bank Deposits(yoy growth)
Total
Lempiras
US$ (rhs)
024681012Jun-11Jun-12Jun-13Jun-14Jun-15Jun-16Yield on Central Bank Paper(In percent)
(1-30) day CB paper
(31-360) day CB paper
5101520Jun-11Jun-12Jun-13Jun-14Jun-15Jun-16Lending Rates(In percent, 3 month moving average)
Nominal
Real
-4-202468Jun-11Jun-12Jun-13Jun-14Jun-15Jun-16Policy Rate (In percent)
Nominal 1/
Real1/ In June 2016, the Central Banklowered its policy rate to 5.5 from 5.75 percent . Deposits growth has slowed, somewhat,, in early 2016......while growth of total credit to the private sector has increased. In June 2016, the Central Bank reduced the policy rate by by 25 basis points, continuing its easing cycle......and nominal lending rates continue to inch lower...Yields on central bank paper have declined recently......but the central bank continues to mop up liquidity.
HONDURAS
Figure 5. Honduras: Fiscal Consolidation Has Moved Ahead of Schedule
Sources: Ministry of Finance and Fund staff estimates and projections.
36
INTERNATIONAL MONETARY FUND
Figure 4. Honduras: Fiscal consolidationhas moved ahead of schedule
0510152025201020112012201320142015Revenues and Official Grants‒Central Government (In percent of GDP)
Total revenue and grants
Tax revenue
0510152025201020112012201320142015Primary Expenditures‒Central Government (In percent of GDP)
Other current expenditure
Wage bill
Capital expenditure
0102030405060201020112012201320142015
Nonfinancial Public Sector
Central GovernmentPublic Debt
-8-7-6-5-4-3-2-1012201020112012201320142015Nonfinancial Public Sector(In percent of GDP)
Overall balance
Primary balance
-9-8-7-6-5-4-3-2-1012201020112012201320142015Central Government(In percent of GDP)
Overall balance
Primary balance
02004006008001000Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16EMBI Spreads
HND
CAPDR excl. HND,NIC
Table 6. Honduras: Selected Economic Indicators
HONDURAS
INTERNATIONAL MONETARY FUND 37
Population (2015)8.6 millionLife expectancy at birth in years (2014)73Per capita income in U.S. dollars (PPP, 2015)4,869Adult literacy (ages 15 and above, 2014)87.2 percentRank in UNDP Development Index (2014)131 of 188Percent of pop. below poverty line (2014)62.8Unemployment rate (2014)3.9Gini index (2013)54Underemployment rate (2012)54.1Oil imports (2015)US $1.2 billionNet FDI (as percent of GDP, 2015)5.4Main exports: coffee, bananas, palm oil, and maquila.201120122013Prog.Prel.Rev. Prog.Prel. Rev. Proj. Rev. Prog.Real Sector (percentage changes in contributions to growth)Real GDP3.84.12.83.03.13.53.63.63.7Domestic demand7.32.80.73.93.14.96.03.64.0Consumption2.53.53.2-1.51.82.62.82.32.5Private2.73.12.8-1.72.01.92.62.21.9Public-0.10.30.50.2-0.20.80.20.00.5Investment3.30.8-0.43.1-0.32.01.81.41.6Statistical discrepancy & inventories1.5-1.5-2.12.41.60.21.30.00.0Net exports-3.51.32.1-0.90.0-1.4-2.30.0-0.3Exports4.65.6-0.84.40.91.70.93.62.9Imports-8.0-4.32.9-5.4-1.0-3.0-3.2-3.6-3.2Prices (annual percentage change) GDP deflator7.83.61.45.35.53.66.33.03.1Consumer prices (eop)5.65.44.96.55.84.22.44.04.5Consumer prices (average)6.85.25.26.26.13.53.23.03.6Saving and Investment (percent of GDP)Gross domestic investment24.424.421.825.622.121.825.226.426.8Private sector21.121.417.922.319.219.319.720.120.3Public sector3.43.03.93.32.82.55.56.36.5Gross national savings16.515.812.217.814.615.818.820.521.1Private sector 15.416.314.918.714.013.715.716.617.2Public sector1.1-0.5-2.7-1.00.62.23.23.93.9Nonfinancial public sector (percent of GDP)Primary balance-3.4-4-7.0-4.7-3.5-0.40.1-0.2-0.1Overall balance -3.2-4.4-7.5-5.4-3.9-1.7-1.0-1.2-1.5Public sector gross debt25.530.240.243.040.942.740.941.943.2Balance of paymentsExternal current account balance (percent of GDP)-8.0-8.6-9.6-7.8-7.4-6.0-6.3-5.9-5.7Exports, f.o.b. (annual percentage change)27.34.8-6.64.73.40.4-0.42.06.1Imports, f.o.b. (annual percentage change)24.92.2-3.73.21.1-0.20.22.35.3Worker's Remittances (percent of GDP)15.915.716.717.117.218.317.818.619.3Net International Reserves (millions of dollars)2,0321,6652,2112,2712,4752,7302,7833,0053,250GIR (In months of imports) 1/3.63.33.83.74.34.54.54.74.7M1 to Net International Reserves (ratio)1.31.31.61.51.71.71.61.81.8Terms of Trade (annual percent change)1.5-1.0-2.42.84.23.96.5-1.2-0.2Real effective exchange rate (eop, depreciation -) 2/1.8-1.70.41.23.64.11.6-0.7…Money and Financial Broad money (percentage change)12.76.68.410.213.212.88.79.19.4Private sector credit (percentage change)9.616.911.29.910.79.610.410.811.1Bank Assets (percent of GDP)80.983.688.9…104.6…97.099.2102.6Private Credit (percent of GDP)46.950.954.3…55.3…55.457.559.8Non-Performing Loans to total loans(ratio) 3/2.93.33.4…3.3…3.03.63.5Capital Adequacy (percent)14.914.714.5…14.6…14.0……Lending rate (eop, in percent)14.216.716.916.915.915.914.012.313.6Deposit rate (eop, in percent) 7.411.411.09.910.410.48.87.69.3Sources: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections.1/ Based on following year's imports of goods and services, excluding maquila. 2/For 2016, this represent actual data as at end July.3/For 2016, this represent actual data as at end July.I. Social IndicatorsII. Economic Indicators2014201520172016
HONDURAS
Table 7a. Honduras: Operations of the Central Government
(In millions of Lempiras)
38
INTERNATIONAL MONETARY FUND
20132014Prog.Prel.Prog.Proj.20172018201920202021Revenue64,11975,97881,52788,17591,38592,16999,064107,131117,031127,420138,608Taxes56,72768,59873,62679,86382,97484,00090,30097,967106,923116,662127,262Taxes on income19,59721,72223,25225,32427,40926,28328,45030,95834,18537,73641,643Taxes on property298275296298316318340368400434470Taxes on goods and services33,06941,78144,93248,50149,61951,79255,38159,93965,01770,52476,498Taxes on foreign trade2,6512,9743,1603,5413,3453,3083,6684,0414,4374,8385,255Other taxes1,1121,8461,9852,1982,2852,2992,4612,6612,8863,1303,396Social contributions00000000000Grants2,8733,2133,4214,1073,4333,3713,4773,4433,7523,8653,869Other revenue4,5204,1664,4804,2054,9784,7985,2875,7226,3556,8937,477Expenditure94,21194,76998,428101,967107,685107,173117,064126,474136,854148,176160,703Expense84,37885,90891,67492,59196,56893,586102,387112,178121,113130,419139,804Compensation of employees 36,80737,25138,45638,59439,80039,96543,30048,25652,34456,77861,588Purchases of goods and services11,28910,29711,38213,84111,50012,20014,00013,73114,89416,15517,524Interest8,61510,20512,92612,12316,07812,60615,63017,50619,99720,77220,904Domestic6,5836,4998,3987,96310,8178,04011,00011,91013,83814,16413,884Foreign2,0323,7064,5284,1605,2614,5664,6305,5966,1606,6087,020Subsidies12875754111100636366697275Grants18,80016,20513,94115,13314,65714,88116,40017,75017,94919,46921,118Current10,24510,3198,2319,8819,2469,71410,10110,93210,55411,44812,418Capital8,5555,8865,7105,2525,4115,1676,2996,8177,3958,0218,701Social benefits5,6253,8086,2895,0135,9474,2054,3154,6705,0665,4955,961Other expense3,1138,0677,9277,7768,4879,6658,67910,19910,79411,67612,634Current 1,7991,5491,9461,4511,3321,5341,3511,4621,3481,4621,586Capital 1,3146,5185,9806,3257,1558,1317,3288,7369,44610,21411,048 Net acquisition of nonfinancial assets9,8338,8616,7549,37711,11713,58714,67714,29615,74117,75820,899Gross Operating Balance-20,258-9,931-10,146-4,416-5,183-1,417-3,323-5,046-4,082-2,998-1,196Net lending/borrowing -30,091-18,792-16,900-13,793-16,300-15,004-18,000-19,342-19,823-20,756-22,095Net financial transactions-30,091-18,792-16,900-13,793-16,300-15,004-18,000-19,342-19,823-20,756-22,095Net acquisition of financial assets4,292-1,324-5,5502,433649-8,490-15,94282-35322-22,631Foreign00000000000Currency and deposits00000000000Loans00000000000Other accounts receivable00000000000Domestic4,292-1,324-5,5502,433649-8,490-15,94282-35322-22,631Currency and deposits4,719-1,324-5,5502,433649-8,490-15,94282-35322-22,631Debt securities00000000000Loans-4270000000000Other accounts receivable00000000000Net incurrence of liabilities34,38317,46811,35016,22516,9496,5142,05719,42419,47020,778-536Foreign31,43510,41412,4273,2424,6646,4289,5276,8411,92117,4955,674Currency and deposits00000000000Loans31,26210,38112,4783,2074,5896,3809,5626,9412,07917,6625,749 Disbursment32,50712,55315,4426,2568,0049,27113,02410,9517,87224,79027,291 Amorizations-1,245-2,171-2,964-3,049-3,415-2,891-3,462-4,010-5,793-7,128-21,541Other accounts payable00000000000Exceptional financing 1/321195100216276249176149120125125Other external -149-163-151-180-201-201-211-249-277-291-200Domestic2,9487,0541,03212,98412,28486-7,47012,58317,5493,283-6,210Currency and deposits00000000000Adjustment for HIPC debt relief 2/-1,567-1,728-2,109-1,815-2,189-2,189-2,298-2,303-2,526-2,652-2,630Memorandum items:000000000Net lending minus interest payments-21,476-8,587-3,975-1,670-222-2,398-2,369-1,83617416-1,191Gross debt172,510192,214210,771207,687239,476232,491259,503289,054322,555340,996364,120Excluding BCH recapitalization162,983180,181198,738192,101227,444216,905243,918273,468306,969325,410348,534Nominal GDP (in billions of Lempiras)376.5409.6440.5451.3470.8481.3514.7557.1604.2655.4710.9Sources: Honduran authorities, Fund staff estimates and projections.1/ Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.2/ Offsets the HIPC/MDRI debt relief accounted as grants.20162015
Table 7b. Honduras: Statement of Operations of the Central Government
(In percent of GDP)
HONDURAS
INTERNATIONAL MONETARY FUND 39
201320172018201920202021Act.Act.Prog.Prel.Prog.Proj.Proj.Proj.Proj.Proj.Proj.Revenue17.018.518.519.519.419.119.219.219.419.419.5Taxes15.116.716.717.717.617.517.517.617.717.817.9Taxes on income5.25.35.35.65.85.55.55.65.75.85.9Taxes on property0.10.10.10.10.10.10.10.10.10.10.1Taxes on goods and services8.810.210.210.710.510.810.810.810.810.810.8Taxes on foreign trade0.70.70.70.80.70.70.70.70.70.70.7Other taxes0.30.50.50.50.50.50.50.50.50.50.5Social contributions0.00.00.00.00.00.00.00.00.00.00.0Grants0.80.80.80.90.70.70.70.60.60.60.5Other revenue1.21.01.00.91.11.01.01.01.11.11.1Expenditure25.023.122.322.622.922.322.722.722.622.622.6Expense22.421.020.820.520.519.419.920.120.019.919.7Compensation of employees 9.89.18.78.68.58.38.48.78.78.78.7Purchases of goods and services3.02.52.63.12.42.52.72.52.52.52.5Interest2.32.52.92.73.42.63.03.13.33.22.9Domestic1.71.61.91.82.31.72.12.12.32.22.0Foreign0.50.91.00.91.10.90.91.01.01.01.0Subsidies0.00.00.20.00.00.00.00.00.00.00.0Grants5.04.03.23.43.13.13.23.23.03.03.0Current2.72.51.92.22.02.02.02.01.71.71.7Capital2.31.41.31.21.11.11.21.21.21.21.2Social benefits1.50.91.41.11.30.90.80.80.80.80.8Other expense0.82.01.81.71.82.01.71.81.81.81.8Current 0.50.40.40.30.30.30.30.30.20.20.2Capital 0.31.61.41.41.51.71.41.61.61.61.6 Net acquisition of nonfinancial assets2.62.21.52.12.42.82.92.62.62.72.9Gross Operating Balance-5.4-2.4-2.3-1.0-1.1-0.3-0.6-0.9-0.7-0.5-0.2Net lending/borrowing -8.0-4.6-3.8-3.1-3.5-3.1-3.5-3.5-3.3-3.2-3.1Net financial transactions-8.0-4.6-3.8-3.1-3.5-3.1-3.5-3.5-3.3-3.2-3.1Net acquisition of financial assets1.1-0.3-1.30.50.1-1.8-3.10.0-0.10.0-3.2Foreign0.00.00.00.00.00.00.00.00.00.00.0Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Loans0.00.00.00.00.00.00.00.00.00.00.0Other accounts receivable0.00.00.00.00.00.00.00.00.00.00.0Domestic1.1-0.3-1.30.50.1-1.8-3.10.0-0.10.0-3.2Currency and deposits1.3-0.3-1.30.50.1-1.8-3.10.0-0.10.0-3.2Debt securities0.00.00.00.00.00.00.00.00.00.00.0Loans-0.10.00.00.00.00.00.00.00.00.00.0Other accounts receivable0.00.00.00.00.00.00.00.00.00.00.0Net incurrence of liabilities9.14.32.63.63.61.40.43.53.23.2-0.1Foreign8.32.52.80.71.01.31.91.20.32.70.8Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Loans8.32.52.80.71.01.31.91.20.32.70.8 Disbursment8.63.13.51.41.71.92.52.01.33.83.8 Amorizations-0.3-0.5-0.7-0.7-0.7-0.6-0.7-0.7-1.0-1.1-3.0Other accounts payable0.00.00.00.00.00.00.00.00.00.00.0Exceptional financing 1/0.10.00.00.00.10.10.00.00.00.00.0Other external 0.00.00.00.00.00.00.00.00.00.00.0Domestic0.81.70.22.92.60.0-1.52.32.90.5-0.9Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Adjustment for HIPC debt relief 2/-0.4-0.4-0.5-0.4-0.5-0.5-0.4-0.4-0.4-0.4-0.4Memorandum items:Net lending minus interest payments-5.7-2.1-0.9-0.40.0-0.5-0.5-0.30.00.0-0.2Gross debt45.846.947.846.050.948.350.451.953.452.051.2Excluding BCH recapitalization43.344.045.142.648.345.147.449.150.849.649.0Nominal GDP (in billions of Lempiras)376.5409.6440.5451.3470.8481.3514.7557.1604.2655.4710.9Sources: Honduran authorities, Fund staff estimates and projections.1/ Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.2/ Offsets the HIPC/MDRI debt relief accounted as grants.201420152016
HONDURAS
Table 8a. Honduras: Statement of Operations of the Nonfinancial Public Sector
(In millions of Lempiras)
40
INTERNATIONAL MONETARY FUND
2013201420172018201920202021Prog.PrelProg.Proj.Revenue114,704 128,693 138,255 142,734 148,677 149,421 160,576 173,441 189,640 209,554 227,568Taxes58,781 70,979 75,887 82,213 85,273 86,279 92,563 100,939 110,309 120,192 131,113Taxes on income19,597 21,722 23,252 25,324 27,409 26,283 28,450 30,958 34,185 37,736 41,643Taxes on property298 275 296 298 316 318 340 368 400 434 470Taxes on goods and services33,069 41,781 44,932 48,501 49,619 51,792 55,381 59,939 65,017 70,524 76,498Taxes on foreign trade2,651 2,974 3,160 3,541 3,345 3,308 3,668 4,041 4,437 4,838 5,255Other taxes3,167 4,227 4,247 4,548 4,584 4,578 4,724 5,633 6,271 6,660 7,246Social contributions12,529 12,467 13,555 13,524 14,819 14,573 15,678 17,307 18,961 20,773 22,532Grants2,887 3,227 3,437 4,107 3,433 3,375 3,485 3,540 3,852 3,966 3,973Other revenue40,506 42,020 45,376 42,890 45,152 45,193 48,850 51,654 56,518 64,623 69,950Sales of goods and services25,222 26,542 28,661 26,811 26,977 27,376 30,178 31,446 34,598 40,846 44,159Interest earnings5,785 6,772 7,624 5,757 6,968 6,930 7,462 8,076 8,760 9,502 10,307Capital revenue1,363 822 793 534 613 603 587 635 689 747 810Nontax revenue8,137 7,883 8,298 9,787 10,594 10,285 10,624 11,498 12,472 13,528 14,674Expenditure142,831 144,767 147,532 147,085 155,658 155,203 168,376 180,065 195,865 215,878 234,467Expense123,861 129,185 133,734 129,480 137,169 132,840 143,672 152,626 166,270 182,854 197,376Compensation of employees 53,529 52,618 53,718 53,720 56,131 55,390 59,691 65,883 71,464 77,518 84,084Purchases of goods and services39,817 38,986 38,845 37,326 36,674 37,186 40,310 42,528 46,765 53,848 58,673Interest7,736 8,560 12,355 10,628 15,284 11,860 14,956 16,569 18,677 19,457 19,646Domestic5,696 4,807 7,795 6,411 9,978 7,174 10,217 10,973 12,517 12,848 12,626Foreign2,040 3,753 4,560 4,216 5,306 4,686 4,739 5,596 6,160 6,608 7,020Subsidies855106911911546000- Social benefits12,724 14,810 15,377 14,839 15,721 14,136 14,322 15,501 16,814 18,238 19,783Other expense9,971 14,159 13,440 12,898 13,240 14,154 14,346 12,145 12,550 13,793 15,190Current 4,973 5,219 4,761 5,354 4,283 4,852 5,086 5,308 5,166 5,570 5,988Capital 4,998 8,940 8,679 7,544 8,957 9,302 9,260 6,836 7,385 8,223 9,202 Net acquisition of nonfinancial assets18,969 15,582 13,798 17,605 18,489 22,363 24,704 27,43929,59633,02437,090Gross Operating Balance-9,157-4914,52113,25411,50716,58116,90420,81523,37026,70030,192Net lending/borrowing -28,127-16,073-9,277-4,351-6,981-5,782-7,800-6,624-6,226-6,324-6,899Net financial transactions-28,127-16,073-9,277-4,351-6,981-5,782-7,800-6,624-6,226-6,324-6,899Net acquisition of financial assets4,3947466,688-1,0903,119-5,795-4,4153,711934,334-18,905Foreign0-27000000000Currency and deposits0-27000000000Loans00000000000Other accounts receivable00000000000Domestic4,3947736,688-1,0903,119-5,795-4,4153,711934,334-18,905Currency and deposits5,7421,1786,690-1,6342,719-7,495-5,4152,911-5473,822-19,314Debt securities00000000000Loans-1,348-405-25444001,7001,000800640512410Other accounts receivable00000000000Net incurrence of liabilities32,52116,81915,9653,26110,100-133,38510,3356,31810,658-12,006Foreign31,41210,33214,2244,5835,6667,96810,4276,5013,63516,8114,050Currency and deposits00000000000Loans31,31710,29914,2744,5485,5907,91910,4626,6013,79216,9784,125Other accounts payable00000000000Exceptional financing 1/246195100215276249176149120125125Other external -151-163-151-180-201-201-211-249-277-291-200Domestic2,6758,2153,8504936,624-5,791-4,7446,1375,210-3,501-13,426Currency and deposits00000000000Loans4,4437,4652,9302,6973,936-1,631-1,4731,348353-8,994-18,919Other accounts payable-1,7684550-3,621-500-7,959-7,5550000PPPs/other02959211,4173,1883,7984,2844,7884,8575,4945,494Adjustment for HIPC debt relief 2/-1,567-1,728-2,109-1,815-2,189-2,189-2,298-2,303-2,526-2,652-2,630Memorandum items:Net lending minus net interest payments-26,176-14,285-4,5465201,335-852-3061,8703,6913,6302,441Gross total debt151,203167,338189,840184,537200,546201,451222,375243,574264,790288,382299,649Nominal GDP (in billions of Lempiras)377410441451471481515557604655711Sources: Honduran authorities, Fund staff estimates and projections.1/ Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.2/ Offsets the HIPC/MDRI debt relief accounted as grants.20162015
Table 8b. Honduras: Statement of Operations of the Nonfinancial Public Sector
(In percent of GDP)
HONDURAS
INTERNATIONAL MONETARY FUND 41
20132014Prog.PrelProg.Proj.20172018201920202021Revenue30.531.431.431.631.631.031.231.131.432.032.0Taxes15.617.317.218.218.117.918.018.118.318.318.4 Taxes on income5.25.35.35.65.85.55.55.65.75.85.9 Taxes on property0.10.10.10.10.10.10.10.10.10.10.1 Taxes on goods and services8.810.210.210.710.510.810.810.810.810.810.8 Taxes on foreign trade0.70.70.70.80.70.70.70.70.70.70.7 Other taxes0.81.01.01.01.01.00.91.01.01.01.0Social contributions3.33.03.13.03.13.03.03.13.13.23.2Grants0.80.80.80.90.70.70.70.60.60.60.6Other revenue10.810.310.39.59.69.49.59.39.49.99.8 Sales of goods and services6.76.56.55.95.75.75.95.65.76.26.2 Interest earnings1.51.71.71.31.51.41.41.41.41.41.4 Capital revenue0.40.20.20.10.10.10.10.10.10.10.1 Nontax revenue2.21.91.92.22.32.12.12.12.12.12.1Expenditure37.935.333.632.633.132.232.732.332.432.933.0Expense32.931.530.428.729.127.627.927.427.527.927.8Compensation of employees 14.212.812.211.911.911.511.611.811.811.811.8Purchases of goods and services10.69.58.88.37.87.77.87.67.78.28.3Interest2.12.12.92.43.22.52.93.03.13.02.8Domestic1.51.21.91.42.11.52.02.02.12.01.8Foreign0.50.91.00.91.11.00.91.01.01.01.0Subsidies0.00.00.00.00.00.00.00.00.00.00.0Social benefits3.43.63.43.33.32.92.82.82.82.82.8Other expense2.63.53.12.92.82.92.82.22.12.12.1Current 1.31.31.21.20.91.01.01.00.90.80.8Capital 1.32.22.01.71.91.91.81.21.21.31.3 Net acquisition of nonfinancial assets5.03.83.13.93.94.64.84.94.95.05.2Gross Operating Balance-2.4-0.11.02.92.43.43.33.73.94.14.2Net lending/borrowing -7.5-3.9-2.2-1.0-1.5-1.2-1.5-1.2-1.0-1.0-1.0Net financial transactions-7.5-3.9-2.2-1.0-1.5-1.2-1.5-1.2-1.0-1.0-1.0Net acquisition of financial assets1.20.2-1.5-0.20.7-1.2-0.90.70.00.7-2.7Foreign0.00.00.00.00.00.00.00.00.00.00.0Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Loans0.00.00.00.00.00.00.00.00.00.00.0Other accounts receivable0.00.00.00.00.00.00.00.00.00.00.0Domestic1.20.2-1.5-0.20.7-1.2-0.90.70.00.7-2.7Currency and deposits1.50.3-1.5-0.40.6-1.6-1.10.5-0.10.6-2.7Debt securities0.00.00.00.00.00.00.00.00.00.00.0Loans-0.4-0.10.00.10.10.40.20.10.10.10.1Other accounts receivable0.00.00.00.00.00.00.00.00.00.00.0Net incurrence of liabilities8.64.10.60.72.10.00.71.91.01.6-1.7Foreign8.32.53.51.01.21.72.01.20.62.60.6Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Loans8.32.53.51.01.21.62.01.20.62.60.6Other accounts payable0.00.00.00.00.00.00.00.00.00.00.0Exceptional financing 1/0.10.00.10.00.10.10.00.00.00.00.0Other external 0.00.00.00.00.00.00.00.00.00.00.0Domestic0.72.0-2.40.11.4-1.2-0.91.10.9-0.5-1.9Currency and deposits0.00.00.00.00.00.00.00.00.00.00.0Loans1.21.80.20.60.8-0.3-0.30.20.1-1.4-2.7Other accounts payable-0.50.1-2.9-0.8-0.1-1.7-1.50.00.00.00.0PPPs/other0.00.10.20.30.70.80.80.90.80.80.8Adjustment for HIPC debt relief 2/-0.4-0.4-0.5-0.4-0.5-0.5-0.4-0.4-0.4-0.4-0.4Memorandum items:Net lending minus net interest payments-7.0-3.5-1.00.10.3-0.2-0.10.30.60.60.3Gross total debt40.240.943.540.942.741.943.243.743.844.042.2Nominal GDP (in billions of Lempiras)376.5409.6440.5451.3470.8481.3514.7557.1604.2655.4710.9Sources: Honduran authorities, Fund staff estimates and projections.1/ Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.2/ Offsets the HIPC/MDRI debt relief accounted as grants.20152016Projected Actual
HONDURAS
Table 9. Honduras: Summary Accounts of Central Bank and Financial System
(In millions of Lempiras, end-December)
42
INTERNATIONAL MONETARY FUND
Prel.201320142015201620172018201920202021Net International Reserves 1/ 62,94575,64885,49595,984107,292120,346134,883151,240171,305(In millions of US$)3,0563,5163,8214,0724,3364,6314,9445,2795,750Net International Reserves (in millions of US$) 2/2,2112,4752,7833,0053,2503,5253,8154,1274,563Net Domestic Assets-39,344-49,253-56,043-63,282-71,332-80,755-91,331-103,340-118,491Credit to the public sector (net)7,2376,1013,3685,93312,71612,71612,71612,71612,716Other depository institutions (net) -49,112-58,135-63,211-70,649-83,649-87,748-91,564-95,605-103,321Other financial institutions6,9176,7008,0269,26510,82610,6818,7486,8144,881Nonfinancial private sector-212-202-858-858-858-870-905-940-975Medium and long-term net foreign assets 2,1811551,0381,6292,261883929516536Other items net-6,356-3,872-4,406-8,602-12,629-16,417-21,254-26,841-32,329Currency issue23,60026,39529,45232,70235,96039,59143,55247,90052,814Net Foreign Assets-10,277-11,845-15,905-15,743-16,306-22,817-29,320-21,081-29,469(In millions of US$) -497-549-709-668-659-878-1,075-736-989Foreign assets (million Lempiras)10,12012,12310,56812,49413,8879,8626,12717,36812,237Foreign assets (in million of US$)490562471530561380225606411Net Domestic Assets190,820215,905236,851258,905282,238314,248349,722373,387417,357Credit to the monetary authorities (net)55,65065,38071,08779,53593,55698,785103,720108,979117,882Credit to other financial institutions (net)-26,045-28,165-30,372-32,510-34,882-37,894-41,249-44,888-48,836Credit to the combined public sector (net)1,0892,5261,181-1,649-7,372-8,937-8,041-20,860-20,550Central government-8,618-9,968-12,307-13,249-15,155-15,676-15,378-19,647-19,543Other nonfinancial public sector5,6408,4699,4607,6015,6895,1675,4661,1841,288Local governments4,0674,0254,0284,0002,0941,5721,871-2,398-2,295Credit to the private sector204,443226,349249,894276,985307,812341,987380,129422,180468,680Local currency 145,428159,179178,301200,473225,942254,536286,825322,886363,258Foreign currency 59,01567,17071,59376,51381,87087,45193,30499,294105,422Other items net-44,316-50,185-49,048-63,456-76,876-79,693-84,837-92,024-99,819Liabilities 180,544204,060220,946243,163265,932291,432320,402352,306387,887Of which: Deposits in domestic currency127,211140,062157,010173,632191,376211,338234,119259,382287,728Of which: Deposits in foreign currency 52,22462,98962,60967,55072,43777,80183,79590,22697,233Net Foreign Assets51,34760,41266,93377,58488,32994,872102,906127,502139,179(In millions of US$) 2,4842,7982,9823,2923,5693,6513,7724,4514,671Net Domestic Assets145,958163,018176,006187,419201,541222,824246,409256,636284,038Credit to the nonfinancial combined public sector8,3268,6274,5494,2845,3443,7794,675-8,144-7,834Credit to the private sector204,443226,349249,894276,985307,812341,987380,129422,180468,680Local currency 145,428159,179178,301200,473225,942254,536286,825322,886363,258Foreign currency 59,01567,17071,59376,51381,87087,45193,30499,294105,422Other assets net-7,369-6,890-5,646-25,245-26,350-31,887-38,500-46,198-53,166Other items net 3/-59,441-65,068-72,791-68,606-85,265-91,055-99,895-111,202-123,642Broad Money (M4)197,305223,429242,939265,003289,870317,697349,315384,137423,217Currency issue6.611.811.611.010.010.110.010.010.3Currency in circulation3.912.212.710.49.49.610.010.010.8Broad money 8.413.28.79.19.49.610.010.010.2Broad money (constant exchange rate)7.512.07.67.78.18.38.78.79.2Credit to the private sector11.210.710.410.811.111.111.211.111.0Credit to the private sector (constant exchange 10.29.49.29.39.79.79.99.810.1M14.513.514.72.59.79.910.210.210.7Sources: Central Bank of Honduras and Fund staff estimates. 1/ Includes allocation of SDR 104.8 million in August, 2009. 2/ Excluding domestic liabilities in foreign currency and deposits of Hondutel. 3/ Includes the revaluation account reflecting changes in the value of assets due to exchange rate fluctuations.(Rate of growth 12 months)I. Central BankII. Other Depository InstitutionsIII. Financial SystemProj.
Table 10. Honduras: Balance of Payments
HONDURAS
INTERNATIONAL MONETARY FUND 43
Prel.201320142015201620172018201920202021Current account-1,763-1,444-1,291-1,241-1,211-1,258-1,249-1,220-1,199Trade Account-3,147-2,998-3,056-3,151-3,255-3,408-3,543-3,639-3,741Exports f.o.b.5,2465,5115,5265,6936,0816,4046,7247,0057,322Maquila Net (exports-imports)1,3301,4181,5721,6091,6821,7631,8481,9322,034Coffee7508399869079951,1161,2181,2691,328Others3,1663,2542,9683,1773,4043,5263,6583,8043,959Imports f.o.b.-8,393-8,508-8,583-8,843-9,336-9,812-10,266-10,644-11,062Petroleum products-2,061-1,903-1,234-1,111-1,366-1,468-1,552-1,651-1,745Others-6,332-6,605-7,349-7,732-7,970-8,344-8,714-8,993-9,318Services (net)-668-698-690-688-673-716-742-767-796Of which: tourism receipts608630650684716757801828859Income (net)-1,353-1,322-1,380-1,473-1,571-1,624-1,680-1,731-1,792Of which: payments on direct investments-1,208-1,129-1,183-1,234-1,317-1,357-1,402-1,448-1,504Of which: public sector interest payments-92-166-181-194-208-221-231-236-240Transfers (net)3,3953,5723,8354,0704,2874,4894,7154,9175,129Of which: Remittances3,0833,3533,6503,8914,1054,3014,5014,6964,899Others312219185179183188214221230Capital and Financial account2,6281,7961,5411,4641,4561,5341,5391,5321,635Direct investment (net)9921,1201,1131,1951,2931,3211,3851,4521,549Other private capital flows (net)1773-66-213-410-191-138-860-306Public sector borrowing (net)1,487458174331419246128101135Disbursements 1,600599351489605455376380932Of which:Multilateral514453203296384234236495546Eurobonds1,00000000000Amortization-70-95-145-145-172-195-233-273-791Errors and omissions 1/-332-8743000000Overall balance533265293222245276289312436Net international reserves (- increase)-546-264-307-222-245-276-289-312-436Current account-9.5-7.4-6.3-5.9-5.7-5.7-5.5-5.2-4.9Trade Account-17.0-15.4-14.9-15.1-15.3-15.5-15.6-15.5-15.4Exports f.o.b.28.428.227.027.228.529.229.629.930.1Maquila Net (exports-imports)7.27.37.77.77.98.08.18.28.4Coffee4.14.34.84.34.75.15.45.45.5Others17.116.714.515.216.016.116.116.216.3Imports f.o.b.-45.4-43.6-42.0-42.3-43.8-44.7-45.3-45.4-45.5Petroleum products-11.1-9.8-6.0-5.3-6.4-6.7-6.8-7.0-7.2Others-34.2-33.9-35.9-37.0-37.4-38.0-38.4-38.4-38.3Services (net)-3.6-3.6-3.4-3.3-3.2-3.3-3.3-3.3-3.3Of which: tourism receipts3.33.23.23.33.43.43.53.53.5Income (net)-7.3-6.8-6.7-7.0-7.4-7.4-7.4-7.4-7.4Of which: payments on direct investments-6.5-5.8-5.8-5.9-6.2-6.2-6.2-6.2-6.2Of which: public sector interest payments-0.5-0.9-0.9-0.9-1.0-1.0-1.0-1.0-1.0Transfers (net)18.418.318.819.520.120.420.821.021.1Of which: Remittances16.717.217.818.619.319.619.820.020.1Capital and Financial account14.29.27.57.06.87.06.86.56.7Direct investment (net)5.45.75.45.76.16.06.16.26.4Other private capital flows (net)0.10.4-0.3-1.0-1.9-0.9-0.6-3.7-1.3Public sector borrowing (net)8.02.30.91.62.01.10.60.40.6Disbursements 8.63.11.72.32.82.11.71.63.8Of which:Multilateral2.82.31.01.41.81.11.02.12.2Eurobonds5.40.00.00.00.00.00.00.00.0Official budget supportAmortization-0.4-0.5-0.7-0.7-0.8-0.9-1.0-1.2-3.2Errors and omissions 1/-1.8-0.40.20.00.00.00.00.00.0Overall balance2.91.41.41.11.11.31.31.31.8Net international reserves (- increase)-2.9-1.4-1.5-1.1-1.1-1.3-1.3-1.3-1.8Residual gap0.00.00.00.00.00.00.00.00.0Memorandum items:Non oil current account (in percent of GDP)1.62.4-0.3-0.60.71.01.31.82.2Terms of trade (percent change)-2.54.36.2-1.2-0.20.40.60.20.0Exports of goods (percent change)-6.63.4-0.42.06.15.04.84.34.4Of Which: volume growth (percent change)-2.42.02.65.74.43.63.73.54.0Imports of goods (percent change)-3.71.10.22.35.34.94.63.83.9Of Which: volume growth (percent change)-1.83.99.74.73.43.94.13.33.8Gross reserves (end of period, millions of U.S. dollars)3,2553,6983,9924,3854,6484,9445,2565,5916,062In months of next year imports (excluding maquila)3.94.34.54.74.74.84.95.15.2Total external debt to GDP ratio (in percent)35.936.836.537.438.939.038.540.139.4External public debt to GDP ratio (in percent)28.128.529.030.031.531.731.332.932.3Nominal GDP (millions of U.S. dollars)18,49919,51120,45020,92121,30521,96122,68723,43724,330Sources: Central Bank of Honduras; and Fund staff estimates and projections.1/ 2016 reflects information through June 2016.(In percent of GDP, unless otherwise indicated)(In millions of U.S. dollars; unless otherwise indicated)Projections
HONDURAS
Table 11. Honduras: External Financing Needs and Sources
44
INTERNATIONAL MONETARY FUND
Prel.201320142015201620172018201920202021Current account deficit1,7631,4441,2911,1971,2101,2241,2571,2211,201Debt amortizations342319362355376393425459971Public debt amortization7095145145172195233273791Private debt amortization272223217210204198192186180Subtotal (requirements)2,1051,7631,6531,5521,5851,6161,6821,6802,172Capital account flows (net)133145141149152157162167174Foreign direct investment (net)9921,1201,1131,1951,2891,2961,3401,3851,429Public sector borrowing (project related)600414351464505455376380932Eurobond1,00000000000Other capital flows (net) 1/-74348178-59-216-16935973Change in reserves (+ decrease)-546-264-307-222-245-276-289-312-436Subtotal (sources)2,1051,7631,4761,5271,4851,6161,6821,6802,172Financing gap00177251000000World Bank……502500000IADB……10001000000IMF……0000000EU……27000000Sources: Central Bank of Honduras and Fund staff estimates and projections.1/ Includes errors and omissions.Proj.
Table 12. Honduras: Medium-Term Macroeconomic Framework
HONDURAS
INTERNATIONAL MONETARY FUND 45
Prel.20142015201620172018201920202021Growth and prices (in percent)Real GDP growth3.13.63.63.73.83.83.83.8GDP deflator5.56.33.03.14.34.54.54.5CPI inflation (eop)5.82.44.04.54.54.54.54.5Investment and savingGross domestic investment22.125.226.426.827.728.529.229.7Private sector19.219.720.120.321.622.522.924.0Public sector2.85.56.36.56.16.06.25.7Gross national savings14.618.820.521.121.923.023.924.8Private sector 14.015.716.617.218.219.119.720.1Public sector0.63.23.93.93.83.94.24.6Balance of paymentsExternal current account -7.4-6.3-5.9-5.7-5.7-5.5-5.2-4.9Non oil current account2.4-0.3-0.60.71.01.31.82.2Gross international reserves (millions of dollars) 3,6983,9924,3854,6484,9445,2565,5916,062Terms of Trade (annual percent change)4.26.5-1.2-0.20.40.60.20.0External debt36.936.537.438.939.038.540.139.4Nonfinancial public sectorRevenue31.431.631.031.231.131.432.032.0Of which: Non-interest revenue and grants 29.830.429.629.729.729.930.530.6Expenditure35.332.632.232.732.332.432.933.0Of which: Noninterest expenditure33.330.229.829.829.329.330.030.2Primary balance-3.50.1-0.2-0.10.30.60.60.3Overall balance -3.9-1.0-1.2-1.5-1.2-1.0-1.0-1.0Central governmentRevenue18.519.519.119.219.219.419.419.5Expenditure23.122.622.322.722.722.622.622.6Of which: Non-interest expenditure20.619.919.619.719.619.319.419.7Primary balance-2.1-0.4-0.5-0.5-0.30.00.0-0.2Overall balance -4.6-3.0-3.1-3.5-3.5-3.3-3.2-3.1Nonfinancial public sector debt Total40.940.941.943.243.743.844.042.2Domestic debt11.511.411.110.911.211.710.39.2External debt 29.329.530.732.332.532.133.732.9Broad money (percentage change)13.28.79.19.49.610.010.010.2Private sector credit (percentage change)10.710.410.811.111.111.211.111.0Bank assets96.197.099.2102.6106.0109.3112.7116.1Private credit55.355.457.559.861.462.964.465.9Non-performing loans to total loans (ratio)3.33.03.63.53.33.23.12.9Capital adequacy (percent)14.614.0………………Lending rate (eop, in percent)15.914.012.313.713.412.812.512.3Deposit rate (eop, in percent)10.48.87.69.39.28.88.68.5Memo items:Nominal GDP (in billions of lempiras)410451481515557604655711Sources: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections. Proj.
HONDURAS
Table 13. Honduras: External Vulnerability Indicators
46
INTERNATIONAL MONETARY FUND
Prel.201320142015201620172018201920202021Exports of goods and services, annual percent change-6.33.9-0.22.45.65.04.84.34.3Imports of goods and services, annual percent change-3.01.70.32.44.65.04.53.93.9Terms of trade (deterioration -)-2.54.36.2-1.2-0.20.40.60.20.0Real effective exchage rate (eop, depreciation -) 0.43.6…………………Current account balance (percent of GDP)-9.5-7.4-6.3-1241.5-1211.3-1258.1-1249.5-1219.9-1199.1Capital and financial account (percent of GDP)14.29.27.57.06.87.06.86.56.7External public debt (percent of GDP)28.128.529.030.031.531.731.332.932.3Gross official reservesin millions of U.S. dollars 3,255 3,698 3,992 4,383 4,646.2 4,941.2 5,253.3 5,588.7 6179.3in percent of short-term external debt 1,022 1,041 1,187 1,284 1,341.1 1,404.8 1,470.5 1,523.4 1632.0Net international reservesin millions of U.S. dollars 2,211 2,475 2,783 3,005 3,249.7 3,525.5 3,814.5 4,126.6 4562.7in percent of short-term external debt 694 697 828 881 938.0 1,002.3 1,067.8 1,124.9 1205.0Sources: Central Bank of Honduras and Fund staff estimates and projections.Proj.
Table 14. Honduras: Structure and Performance of the Banking Sector
HONDURAS
INTERNATIONAL MONETARY FUND 47
20092010201120122013201420152016M7Total assets (in millions of Lempiras) 1/220,277236,665270,981302,662341,614393,763432,178449,652(In percent of GDP)8079818491969797.9Number of banks1717171717171515Domestic88777866Foreign99101010999Bank concentrationNumber of banks accounting for at least25 percent of total assets 2222222275 percent of total assets 66666655Capital adequacy Regulatory capital to risk-weighted assets 14.314.914.914.714.514.614.013.7Capital (net worth) to assets 9.39.29.19.39.19.28.78.6Asset quality and compositionNonperforming loans( NPLs) to total loans 2/4.73.72.93.33.43.33.03.6NPLs net of provisions to capital 2/4.2-4.4-6.5-4.6-5.2-5.2-5.1-0.9Restructured loans to regulatory capital 9.019.826.624.725.322.327.926.4Non earning assets net of provisions to regulatory capital47.247.946.945.044.151.254.652.5Provisions to total loans4.14.33.94.04.24.13.83.7Provisions to NPLs 2/86.2118.9135.0121.8123.7125.5126.1103.9Sectoral distribution of loans to total loans: Commerce11.612.713.014.414.314.313.613.7Construction and real estate33.534.232.930.828.927.124.624.2Agriculture and related sectors5.14.74.94.44.75.05.97.3Industry15.413.612.311.711.911.111.110.6Consumption15.716.518.320.521.921.021.321.7Other18.718.318.618.218.021.323.522.3ProfitabilityReturn on assets (ROA)1.21.31.31.51.41.41.41.3Return on equity (ROE) 12.612.513.215.914.513.414.613.5Interest margin to total income48.148.248.952.147.552.152.852.9Personnel expenses to administrative expenses39.639.639.639.441.841.742.042.4LiquidityLiquid assets to total assets21.124.424.321.425.025.224.624.3Liquid assets to total short-term liabilities 52.258.258.856.269.770.869.567.2Dollarization Deposits in foreign currency in percent of total30.029.529.130.630.632.029.830.1Credit in foreign currency in percent of total25.128.330.131.233.534.733.231.7Source: National Commission of Banking and Insurance.1/ Includes contingent assets. 2/ As of 2012 NPLs include delinquency of restructured loans.Prel.
HONDURAS
Table 15. Honduras: Millennium Development Goals
48
INTERNATIONAL MONETARY FUND
1990199520002005201020112012201320142015Goal 1: Eradicate extreme poverty and hunger Employment to population ratio, 15+, total (%)56.758.963.458.759.259.660.060.260.4..Employment to population ratio, ages 15-24, total (%)48.350.854.147.144.545.045.645.845.8..Poverty gap at $1.25 a day (PPP) (%)20.811.18.113.94.87.99.37.7....Malnutrition prevalence, weight for age (% of children under 5)15.816.112.58.6....7.1......Prevalence of undernourishment (% of population)23.020.519.016.714.914.613.712.812.312.2Goal 2: Achieve universal primary education Primary completion rate, total (% of relevant age group)64.169.9..81.597.2100.7100.794.590.7..School enrollment, primary (% net)88.2..88.590.896.197.597.393.894.0..Goal 3: Promote gender equality and empower women Proportion of seats held by women in national parliaments (%)10.2..9.423.418.019.519.519.525.825.8Ratio of girls to boys in primary and secondary education (%)1.0....1.11.11.11.11.11.0..Goal 4: Reduce child mortality Immunization, measles (% of children ages 12-23 months)90.089.098.096.098.095.093.089.088.0..Mortality rate, infant (per 1,000 live births)45.136.930.525.020.719.919.218.618.017.4Mortality rate, under-5 (per 1,000 live births)58.246.437.430.024.423.522.621.821.120.4Goal 5: Improve maternal health Births attended by skilled health staff (% of total)46.954.955.766.9....82.9......Contraceptive prevalence (% of women ages 15-49)46.749.261.665.1....73.2......Maternal mortality ratio (modeled estimate, per 100,000 live births)272.0166.0133.0150.0155.0149.0141.0135.0132.0129.0Goal 6: Combat HIV/AIDS, malaria, and other diseases Incidence of tuberculosis (per 100,000 people)114.0114.0114.073.047.052.048.046.043.0..Prevalence of HIV, total (% of population ages 15-49)1.01.51.20.80.50.50.50.40.4..Tuberculosis case detection rate (%, all forms)65.078.090.066.082.082.082.082.082.0..Goal 7: Ensure environment sustainability CO2 emissions (metric tons per capita)0.50.70.81.11.11.1........Forest area (% of land area)72.764.957.151.846.445.344.343.2..41.0Improved sanitation facilities (% of population with access)48.255.963.370.577.478.780.081.382.682.6Improved water source (% of population with access)73.177.080.884.588.088.789.390.090.691.2Terrestrial protected areas (% of total land area)13.5..21.5..........21.6..Goal 8: Develop a global partnership for development Internet users (per 100 people)0.00.01.26.511.115.918.117.819.1..Mobile cellular subscriptions (per 100 people)0.00.02.518.6124.7103.792.995.993.5..Source: Millenium Development Goals, World Bank.
Table 16. Disbursements, Purchases, and Timing of Reviews under the SCF/SBA
Arrangements
HONDURAS
INTERNATIONAL MONETARY FUND 49
Amount (millions of SDRs)Percent of quota 1/Date of AvailabilityConditionsTotal SCFSBA 2/TotalSCFSBADecember 3, 2014Board approval of the arrangements6.4756.475---2.592.59---April 15, 2015Observance of end-December 2014 performance criteria and continuous performance criteria and completion of first review3.2383.238---1.301.30---October 15, 2015Observance of end-June 2015 performance criteria and continuous performance criteria and completion of second review3.2383.238---1.301.30---April 15, 2016Observance of end-December 2015 \performance criteria and continuous performance criteria and completion of third review. 19.42519.425---7.787.78---October 26, 2016Observance of end-June 2016 performance criteria and continuous performance criteria and completion of fourth review (SCF) and third and fourth reviews (SBA)89.50019.42570.075 3/35.837.7828.05April 15, 2017Observance of end-December 2016 performance criteria and continuous performance criteria and completion of fifth review3.81253.81251.531.53October 15, 2017Observance of end-June 2017 performance criteria and continuous performance criteria and completion of sixth review3.81253.81251.531.53Total129.50051.8077.70051.8420.7431.11Honduras' quota is currently SDR 249.8 million. Prior to the effectiveness of Honduras's quota increase, its quota was SDR 129.5 million.See Press Release No. 16/25 on January 27 (http://www.imf.org/external/np/sec/pr/2016/pr1625a.htm) for more informationhttp://www.imf.org/external/np/sec/pr/2016/pr1625a.htm
1/ Refers to current quota2/ Revisions to this column reflect the rephasing necessary to take into account the increase in Honduras's First Credit Tranche as a result of its quota increase under the Fourteenth General Review of Quota. For clarity, historical information is not shown. 3/ Of this amount of SDR 70.075 million, an amount of SDR 62.45 million, equivalent to Honduras's First Credit Tranche was available from when Honduras's quota increase under the Fourteenth General Review of Quotas became effective and is not subject to phasing or performance clauses. The remaining amount of SDR 7.625 million is to be made available upon completion of the combined third and fourth reviews.
HONDURAS
Table 17. Honduras: Indicators of Fund Credit
(As of August 31, 2016; in units indicated)
50
INTERNATIONAL MONETARY FUND
20132014201520162017201820192020Existing Fund creditStock, in millions of SDRs 1/8.14.11.00.00.00.00.00.0Obligations, in millions of SDRs4.14.13.11.00.00.00.00.0SCFStock, in millions of SDRs 1/0.00.00.051.851.851.851.846.0Disbursements, in millions of SDRs0.00.00.051.80.00.00.00.0Obligations, in millions of SDRs 2/0.00.00.00.00.10.10.36.0Principal, in millions of SDRs0.00.00.00.00.00.00.05.8Interest and charges, in millions of SDRs0.00.00.00.00.10.10.30.3SBAStock, in millions of SDRs 1/0.00.00.070.177.777.777.741.7Disbursements, in millions of SDRs0.00.00.070.17.60.00.00.0Obligations, in millions of SDRs 3/0.00.00.00.40.80.90.936.8Principal, in millions of SDRs0.00.00.00.00.00.00.036.1Interest and charges, in millions of SDRs0.00.00.00.40.80.90.90.7Stock of existing and prospective Fund credit 1/In millions of SDRs8.14.11.0121.9129.5129.5129.587.7In percent of quota3.31.60.448.851.851.851.835.1In percent of exports of goods and services0.10.10.01.81.81.81.71.1In percent of external debt0.20.10.02.22.22.12.11.3In percent of gross reserves0.40.20.03.93.93.73.52.2Obligations to the Fund from existing arrangements and prospective Fund arrangementsIn millions of SDRs4.14.13.11.41.01.01.142.8In percent of quota1.61.61.20.60.40.40.417.1In percent of exports of goods and services0.10.10.00.00.00.00.00.5In percent of external debt0.10.10.10.00.00.00.00.6In percent of gross reserves0.20.20.10.00.00.00.01.13/ Expected repayment schedule SBA, assuming full drawings and a rate of charge of 1.05 percent. The Honduran authorities have expressed their intention to treat the arrangement as precautionary, since balance of payment pressures have not materialized.Projections1/ End of period.2/ Expected SCF repayment schedule, assuming full drawings and interest at zero percent through end 2016, 0.25 percent through end 2018 and 0.50 percent thereafter. The Honduran authorities have the intention to treat the arrangement as precautionary.
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Annex I. Debt Sustainability Analysis
Risk of external debt distress:
Augmented by significant risks stemming from domestic
public and/or private external debt?
Moderate
No
The debt sustainability analysis (DSA) shows improved prospects relative to the previous review.1 The
main factors for this assessment are the stronger fiscal consolidation—containing structural fiscal
measures and the adoption of a fiscal anchor through a fiscal responsibility law—and improved
external conditions. External and public debt are expected to remain within indicative thresholds in
most scenarios, and public domestic and private external debt are relatively low and sustainable.
However, the need for further structural reforms on the monetary and fiscal policies support staff’s
assessment to keep the risk of external debt distress as moderate.2, 3
A. Background
1.
As part of the migration of the fiscal accounts towards the GFS-2001 standard, the
government’s institutional coverage underpinning the DSA is the non-financial public sector
(NFPS). The NFPS is a comprehensive measure of the government’s impact on the economy. It
comprises the general government (central government and local governments) plus non-financial
public companies. The NFPS coverage also provides consistency to the debt benchmarking exercise
as the reference parameters were calculated based on the IMF Fiscal Affairs Department’ Historical
Public Debt Database which uses the general government gross debt as main indicator.4 The SPNF
gross debt also goes far beyond the recommended public debt coverage.5
2.
Honduras’ NFPS debt increased slightly in 2015. After strong implementation of the fiscal
consolidation program, the gross public debt stood at 40½ percent of GDP in 2015, a decrease of ½
percent of GDP vis-à-vis 2014. The continuous improvement of the fiscal position has been the main
driver of this result. In 2015, the fiscal accounts posted a record-low deficit of 1 percent of GDP. The
public debt stock presented in this document includes also an estimation of the stock of domestic
arrears (2 percent of GDP). Additionally, as the authorities have adopted the IPSAS-32 standard for
1 See Annex I of the Second Reviews under the Stand-By Arrangement and the Arrangement under the Standby
Credit Facility-Press Release; and Staff Report (IMF Country Report No. 16/4).
2 The DSA has been jointly prepared with the World Bank, and cleared by Masato Miyazaki (IMF) and John Panzer
(IDA).
3 Honduras three-year average CPIA score is 3.41 and its policy performance category is medium.
4 See Abbas and others (2010) for details on the public debt database.
5 Dippelsman, Dziobek, and Gutiérrez Mangas (2012) recommended the use of the general government gross debt
with full instrument coverage as the main headline indicator for public debt.
INTERNATIONAL MONETARY FUND 51
HONDURAS
reporting PPP operations in the fiscal accounts, the net stock of liabilities stemming from PPPs is
also included into the gross public debt stock (½ percent of GDP).6
3.
Public debt is mostly with foreign creditors. About 70 percent of total public debt is
external but the share of domestic debt has risen in recent years. The main external lenders to
Honduras are the Inter-American Development Bank (IADB), the Central American Bank for
Economic Integration, and the World Bank. Debt to these institutions carries long maturities but only
the IADB continues to provide loans on concessional terms (i.e., with a grant element of at least
35 percent). Domestic public debt is mainly to commercial banks, has a shorter—though rising—
maturity (about 3 years), and carries a higher real interest rate (Tables A1 and A2). In 2015 the
authorities re-profiled around US$400 million in domestic debt. As a result of the operation, the
half-life of domestic debt has increased from 3.3 to 4.3 years.
B. Underlying Assumptions
Economic growth. The baseline scenario assumes that growth in Honduras will rise to
4.
3.7 percent in 2017 and stabilize at about 3.8 percent in the long-run––broadly in line with its
current estimated potential. This reflects a slight improvement from the previous DSA for 2016 and
2017, where growth was expected to reach 3.5 and 3.7 percent, respectively. Private consumption is
expected to remain the main driver of domestic demand growth driven by higher confidence and
improved security environment. The increase in private investment is expected to benefit from
reduced uncertainty due to adoption of the fiscal responsibility law, and also by a fiscal impulse
through complementary infrastructure spending. Other factors that will support growth include
more supportive monetary policy, continuing improvement in the terms of trade as well as the
steady recovery in the U.S. The latter is expected to boost Honduran economy both through higher
remittances and external demand.
Fiscal policy. A critical change relative to the previous DSA is that the fiscal projections are
5.
now aligned to the recently-enacted fiscal responsibility law (FRL), which puts the medium-term
fiscal position on a firmer footing. The law sets a fiscal anchor by establishing a ceiling of 1 percent
of GDP for the public deficit over the medium-term. Our baseline scenario factors in a cumulative
fiscal adjustment (measured using the primary balance) of about 7 percent of GDP during 2014–17,
with the primary balance becoming consistently positive starting in 2017. The fiscal consolidation
included a combination of higher tax revenues (about 2½ percent of GDP) and lower expenditures
(about 4½ percent of GDP). On the revenue side, the main elements were an increase in tax rates
and the adoption of anti-evasion measures geared to strengthen revenue administration; on the
spending side, the elements were the rightsizing in public employment and reshaping the role of
the state in strategic sectors such as energy and telecommunications. The fiscal deficit is projected
to be in line with the law’s parameters for the next years.
6 See International Financial Reporting Standards (2013) for details on the IPSAS-32 accounting standard. The
amount of arrears estimated is based on the current stock of unpaid claims. The authorities are currently
implementing an audit with the assistance of an international audit firm to identify valid claims.
52
INTERNATIONAL MONETARY FUND
6.
Fiscal institutions. Implementing the FRL is the critical challenge for the next years. On this
HONDURAS
front, the experience in Latin America
with the adoption of a FRL is mixed.
In some countries, a FRL failed to
institutionalize fiscal prudence and in
others they served to catalyze fiscal
reforms and became the backbone of
sound policy making. The
implementation of the FRL in
Honduras will require developing
institutions, strengthening
commitment, and fostering
transparency and accountability
across all levels of government. These
processes would need time to mature
and therefore should be seen as medium term targets.
7.
Public sector financing. Financing of the public sector is assumed to come mainly from
external sources with a gradual increase in domestic sources. It is, however, assumed that the
financing mix changes toward less concessional sources compared to recent years (Table A2),
including within multilateral institutions. Due to lower financing needs, no placement of external
bonds is included in the current DSA although the authorities could take advantage of market
opportunities to do debt management operations. Other financing needs are met through official,
mostly multilateral, financing.
8.
External sector. The external current account deficit is projected to decline from 6.3 percent
in 2015 to about 5 percent by 2021, and stabilize at about 4½ percent of GDP over the longer term.
The external position is expected to improve over the medium to long-term owing to supportive
macroeconomic policies and better terms of trade. The improvement in the current account reflects
favorable external conditions (including lower oil prices7 and robust worker remittances), and a
stronger macroeconomic policy mix (fiscal consolidation based on reaching the targets stated in the
FRL). As in the previous DSA, the current account deficit continues to be financed through foreign
direct investment and, to a lesser extent, public sector borrowing, with very small private sector
flows. This allows international reserves to increase to about 4.9 months of non-maquila imports by
2018 and about 5.5 months of non-maquila imports over the medium term.
7 The Second Reviews projected an APSP of US$50.36 per barrel for 2016. Oil price assumptions are based on the July
WEO, which projects an APSP of $42.96 per barrel for 2016.
INTERNATIONAL MONETARY FUND 53
4.56.58.510.56/1/20139/1/201312/1/20133/1/20146/1/20149/1/201412/1/20143/1/20156/1/20159/1/201512/1/20153/1/20166/1/20169/1/2016JP Morgan EMBIG Sovereign Yield(USD-denominated, percent)
HONDURAS
Table 1. Selected Macroeconomic Indicators, Current vs. Previous DSA
C. External DSA
External debt is expected to start decreasing around 2020 (Table A2). External debt ratios
9.
are projected to peak at about 40 percent of GDP in 2019-20, from about 37 percent of GDP in
2015. The share of external debt in total public debt rises slowly to about 85 percent by the mid-
2020s. The increase takes place as total debt decreases substantially due to fiscal consolidation.
Private external debt is less than 10 percent of GDP and is expected to shrink with the ongoing de-
dollarization of the economy.
External debt ratios remain within indicative thresholds in most scenarios.8 The ratios
10.
for the PV of public debt and public debt service remain below their indicative thresholds in the
baseline scenario throughout the projection period (Table A4). Compared to the previous DSA, the
threshold for the ratio of debt service to revenue does not exceed the indicative threshold in any
year,9 an improvement with respect to the previous DSA. The improvement largely reflects improved
8 Honduras has large remittances inflows—about 18 percent of GDP. Therefore, the indicative external DSA
thresholds reported are remittances-adjusted as per the DSA template.
9 The standardized most extreme shock scenario that simulates a 30 percent depreciation of the currency may
overstate risks in a country like Honduras with a longstanding stable U.S. dollar exchange rate whose external debt is
denominated primarily in U.S. dollars.
54
INTERNATIONAL MONETARY FUND
201520162017Long term 1/Real GDP growth (percent) Current DSA3.63.63.73.8 Previous DSA3.53.53.74.0GDP deflator growth (percent) Current DSA6.33.03.14.5 Previous DSA3.63.63.94.0Primary balance (% of GDP) Current DSA0.1-0.2-0.1-0.1 Previous DSA-1.2-0.4-0.30.2Current account balance (% of GDP) Current DSA-6.3-5.9-5.7-4.6 Previous DSA-6.0-5.8-5.8-5.4Net FDI (% of GDP) Current DSA5.45.76.16.4 Previous DSA5.75.85.85.71/ Defined as the last 15 years of the projection period. For the current DSA, the long term covers the period 2022-36, whereas for the previous DSA it covered 2021-35.
HONDURAS
initial conditions due to the 2015 fiscal results, and the binding commitments included in the fiscal
responsibility law. As in the previous DSA, the spikes in debt service ratios reflect the amortization of
a global bond with a balloon payment. The ratio of debt service to exports and remittances remain
well below its threshold under all scenarios. External public debt rises initially but remains below the
indicative threshold and starts to decline earlier than in the previous DSA due to stronger fiscal
consolidation and more favorable external conditions.
Debt service ratios remain broadly within indicative thresholds using the probability
11.
approach. While the ratio of external debt service to revenue discussed above remains within the
indicative 20 percent threshold, it falls within the 10 percent band that defines borderline cases.10 As
a result, Figure A3 reports the results from the probability approach. The ratio of debt service to
revenue shows one breach, of 20bps, in a single year in the most extreme scenario of a 30-percent
depreciation. Under the most extreme scenario (a negative shock to export value), however, the
present value of debt to GDP goes above the threshold for about 8 years. Going forward, some of
the policy reforms that the authorities have embarked upon would increase the overall flexibility and
dynamism of the economy to cushion such shocks. In particular, the ongoing scaling up of public
sector investment in high-priority infrastructure would increase overall economy-wide productivity
growth and lead to the development of other sectors, thus helping to make the economy more
diversified and resilient to export shocks, such as the one described in the scenario.
12.
real, fiscal and financing shocks. The customized scenario aims at capturing possible downside
risks and key vulnerabilities in Honduras. It includes negative shocks to GDP growth, which could
arise from weaker external conditions; tighter external financing conditions that could be associated
with negative developments in international financial markets such as Fed tapering and turmoil in
emerging markets; a weaker fiscal position from possible slippages in the implementation of the
fiscal responsibility law.11 In this scenario, external public debt rises initially but remains below the
indicative threshold and starts to decline in the early 2020s. The ratio of debt service to exports and
remittances, and to revenue also remain below their indicative thresholds.
External debt indicators appear resilient to a customized scenario combining negative
10 The indicator reaches 19.4 percent in one year, with the band around the 20 percent indicative threshold in this
case being defined as ratios of between 19 and 21 (see paragraph 80 of the Staff Guidance Note on the Application
of the Joint Bank-Fund Debt Sustainability Frameworks for Low-Income Countries).
11 Specifically, in the customized scenario (i) real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, and rises on
average 0.25 percentage points per year to reach 3.5 percent in 2021, staying at this level for the remainder of the
DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average
interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of
GDP in 2017 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA
period.
INTERNATIONAL MONETARY FUND 55
HONDURAS
Table 2. Baseline vs. Customized Scenario 1/
D. Public DSA
13.
Public debt ratios are expected to peak in 2020 and then start to decline subsequently
(Table A3). Public debt is projected to peak at about 44 percent of GDP in 2020 (up from
40.9 percent of GDP in 2015) and start falling slowly as fiscal consolidation proceeds and interest
payments decline reaching 35 percent of GDP by 2027. In present value terms, the public-debt ratio
is expected to peak at 38 percent of GDP in 2019 and fall to about 30 percent of GDP in the late
2020s. The public debt dynamics remains somewhat vulnerable to both policy-related and
exogenous shocks, especially to those related to economic growth and fiscal policy (Table A3). Only
the scenario based on historical variables breaches the PV of debt-to-GDP ratio. This is because
Honduras ran large fiscal deficits before the recent consolidation program. Currently, the authorities
have shown their commitment to fiscal prudence with a reduction of 7 points of GDP in the fiscal
deficit in 2 years and their intention to pursue within this line has been clearly stated in the issuance
of the fiscal responsibility law. Because of this, we do not see the scenario based on historical
behavior of fiscal variables as representative of the future evolution of the Honduran debt dynamics.
14.
The exposure to contingent liabilities seems to be limited. Several measures recently
taken by the authorities limit the exposure of public debt to contingent liabilities. For instance, by
doubling the contribution rate for the social security institute, the authorities’ have improved its
actuarial position; they amended the PPP framework law to limit the provision of government
guarantees for PPP operations; and by upgrading to international standards the PPPs accounting
(see section A), they have made transparent the potential fiscal impact of PPP’s operations. There
56
INTERNATIONAL MONETARY FUND
201620172018Long term 2/Real GDP growth (percent) Baseline3.63.63.73.8 Customized2.62.52.83.5Average interest rate on new external debt Baseline3.93.93.93.9 Customized5.05.05.05.0Fiscal balance Baseline-1.0-1.4-1.1-0.7 Customized-1.0-3.4-2.8-1.11/ In the customized scenario, (i) real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2021, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of GDP in 2017 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period.
HONDURAS
could, however, be a contingent obligation for ENEE if the interpretation of financial penalties for
differing payments to energy providers, currently under litigation, materializes. That said, this liability
would be small. During 2009–15, the nominal amount under dispute is about 0.6 percent of GDP,
plus indemnification costs that are to be decided by the courts. As part of the implementation of a
medium-term fiscal framework, the authorities are developing a comprehensive framework to
analyze and determine potential fiscal risks.
E. Conclusion
Despite marked improvements on public and external debt indicators, supported by a
15.
strong program of reforms, the risk of external debt distress remains as moderate. The
improvement in debt indicators reflects stronger macroeconomic policies underpinned by structural
reforms, which would translate into lower fiscal deficits over the medium-term. Together with
stronger economic growth, relative to the previous DSA, debt indicators have improved significantly.
The FRL is a great achievement and sets the roadmap for a series of structural fiscal reforms over the
coming years. On the monetary front, the upgrading the monetary policy framework will be key to
enhance the economy’s resilience to external shocks. Proper implementation of fiscal and monetary
reforms is critical to incline the risk assessment towards a low distress rating.
INTERNATIONAL MONETARY FUND 57
HONDURAS
Table A1. Honduras: External Debt Sustainability Framework, Baseline Scenario, 2013-2036 1/
(In percent of GDP, unless otherwise indicated)
58
INTERNATIONAL MONETARY FUND
Historical6/Standard6/AverageDeviation 2016-2021 2022-2036201320142015201620172018201920202021Average20262036AverageExternal debt (nominal) 1/36.437.637.038.239.739.839.340.940.033.421.6of which: public and publicly guaranteed (PPG)28.529.329.530.732.332.532.133.732.926.514.9Change in external debt11.61.3-0.61.21.50.1-0.51.6-0.8-1.5-0.9Identified net debt-creating flows 4.2-0.2-0.9-1.1-1.7-1.7-2.0-2.4-2.9-2.9-2.8Non-interest current account deficit8.96.85.26.93.54.64.44.44.23.93.73.63.73.6Deficit in balance of goods and services20.719.018.318.318.418.818.918.818.618.618.6Exports 47.847.144.744.846.447.347.948.448.648.648.6Imports 68.566.163.063.164.866.066.867.267.367.367.3Net current transfers (negative = inflow)-18.4-18.4-18.8-19.41.8-19.5-20.1-20.4-20.8-21.0-21.1-21.1-21.1-21.1of which: official-0.8-0.5-0.4-0.8-0.8-0.8-0.9-0.9-0.9-0.9-0.9Other current account flows (negative = net inflow)6.66.25.65.86.16.16.16.16.26.06.1Net FDI (negative = inflow)-5.4-5.8-5.4-5.81.2-5.7-6.1-6.0-6.1-6.2-6.4-6.4-6.4-6.4Endogenous debt dynamics 2/0.8-1.3-0.70.00.0-0.1-0.1-0.1-0.3-0.1-0.1Contribution from nominal interest rate0.70.61.11.31.31.41.41.41.21.10.7Contribution from real GDP growth -0.7-1.1-1.3-1.3-1.4-1.5-1.5-1.4-1.5-1.3-0.8Contribution from price and exchange rate changes 0.7-0.8-0.5……………………Residual (3-4) 3/7.31.50.32.23.21.91.54.02.11.41.9of which: exceptional financing-0.10.00.00.00.00.00.00.00.00.00.0PV of external debt 4/......30.831.632.332.932.630.032.527.718.1In percent of exports ......68.870.769.669.668.162.066.857.037.3PV of PPG external debt......23.324.224.925.625.522.925.420.811.5In percent of exports ......52.154.153.654.153.147.352.342.823.6In percent of government revenues......75.879.881.683.982.873.081.066.336.2Debt service-to-exports ratio (in percent)16.917.022.317.216.916.516.320.415.815.013.2PPG debt service-to-exports ratio (in percent)1.62.03.74.14.24.34.48.94.44.12.7PPG debt service-to-revenue ratio (in percent)2.63.05.46.06.46.76.913.76.86.44.2Total gross financing need (Billions of U.S. dollars)2.42.12.31.71.61.71.72.11.61.92.9Non-interest current account deficit that stabilizes debt ratio -2.75.65.83.52.94.24.72.34.65.14.6Key macroeconomic assumptionsReal GDP growth (in percent)2.83.13.63.62.43.63.73.83.83.83.83.83.83.83.8GDP deflator in US dollar terms (change in percent)-2.92.31.54.13.7-1.3-1.8-0.7-0.5-0.50.0-0.82.02.01.8Effective interest rate (percent) 5/2.91.73.22.40.53.63.63.63.63.63.13.53.33.33.4Growth of exports of G&S (US dollar terms, in percent)-6.33.9-0.25.513.12.45.65.04.84.34.34.45.85.85.7Growth of imports of G&S (US dollar terms, in percent)-3.01.70.36.815.82.44.65.04.53.93.94.15.85.85.7Grant element of new public sector borrowing (in percent)...............20.917.118.220.313.42.315.316.916.916.9Government revenues (excluding grants, in percent of GDP)29.730.630.730.330.530.530.731.431.431.431.731.4Aid flows (in Billions of US dollars) 7/0.40.30.30.30.30.20.20.20.20.30.4of which: Grants0.10.20.20.10.10.10.10.10.10.20.3of which: Concessional loans0.20.20.10.10.10.00.00.10.10.10.0Grant-equivalent financing (in percent of GDP) 8/.........1.21.11.11.00.80.70.90.80.9Grant-equivalent financing (in percent of external financing) 8/.........38.836.033.539.537.113.736.650.742.7Memorandum items:Nominal GDP (Billions of US dollars) 18.419.420.520.921.322.022.723.424.331.655.7Nominal dollar GDP growth -0.25.55.12.31.83.13.33.33.82.95.85.85.7PV of PPG external debt (in Billions of US dollars)4.74.95.25.55.65.26.16.56.3(PVt-PVt-1)/GDPt-1 (in percent)1.31.11.40.7-1.83.51.10.60.00.1Gross workers' remittances (Billions of US dollars) 3.13.43.63.94.14.34.54.74.96.411.2PV of PPG external debt (in percent of GDP + remittances)......19.820.420.921.421.319.121.217.39.5PV of PPG external debt (in percent of exports + remittances)......37.238.237.938.337.633.537.030.316.7Debt service of PPG external debt (in percent of exports + remittances)......2.72.93.03.03.16.33.12.91.9Sources: Country authorities; and staff estimates and projections.01/ Includes both public and private sector external debt.2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 4/ Assumes that PV of private sector debt is equivalent to its face value.5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief.8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).Actual Projections3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.
Table A2. Honduras: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed
External Debt, 2016-2036
(In percent)
HONDURAS
INTERNATIONAL MONETARY FUND 59
20162017201820192020202120262036Baseline2122222222221810A. Alternative ScenariosA1. Key variables at their historical averages in 2016-2036 1/2122242526283438A2. New public sector loans on less favorable terms in 2016-2036 22121232323242217A3. Customized 7/ 2022242527283027B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2017-20182121222222221810B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/2125333333332814B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-2018212121212021179B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/2124282727272312B5. Combination of B1-B4 using one-half standard deviation shocks 2124292828282412B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/2128292928282313Baseline3939403938383117A. Alternative ScenariosA1. Key variables at their historical averages in 2016-2036 1/3941434547506271A2. New public sector loans on less favorable terms in 2016-2036 23939414140423929A3. Customized 7/ 4648515355586256B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2017-20183938393837373016B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/3949696867685828B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20183938393837373016B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/3945514948484020B5. Combination of B1-B4 using one-half standard deviation shocks 3947595756564823B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/3938393837373016Baseline8284878683836837A. Alternative ScenariosA1. Key variables at their historical averages in 2016-2036 1/8287929497104123134A2. New public sector loans on less favorable terms in 2016-2036 28284898988928663A3. Customized 7/ 8072798385909785B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2017-20188284888784856937B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/829812912812512610951B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20188280818077786434B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/82931081071041058844B5. Combination of B1-B4 using one-half standard deviation shocks 82921101091061079144B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/821181221201161179551PV of debt-to-exports+remittances ratioPV of debt-to-revenue ratioProjectionsPV of debt-to-GDP+remittances ratio
HONDURAS
Table A2. Honduras: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed
External Debt, 2016-2036 (concluded)
(In percent)
60
INTERNATIONAL MONETARY FUND
Baseline23333642A. Alternative ScenariosA1. Key variables at their historical averages in 2016-2036 1/23333655A2. New public sector loans on less favorable terms in 2016-2036 223333643A3. Customized 7/ 33444865B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2017-201823333642B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/23455964B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201823333642B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/23344753B5. Combination of B1-B4 using one-half standard deviation shocks 23444863B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/23333642Baseline567771494A. Alternative ScenariosA1. Key variables at their historical averages in 2016-2036 1/56667121010A2. New public sector loans on less favorable terms in 2016-2036 2566771397A3. Customized 7/ 56778151210B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2017-20185677715104B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/5679916127B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-2018566771394B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/5678815116B5. Combination of B1-B4 using one-half standard deviation shocks 5678815116B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/599101020136Memorandum item:Grant element assumed on residual financing (i.e., financing required above baseline) 6/1111111111111111Sources: Country authorities; and staff estimates and projections.1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assumingan offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI.5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.Debt service-to-revenue ratioDebt service-to-exports+remittances ratio7/ In the customized scenario, (i) real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2021, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of GDP in 2015 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period.
Figure A1. Honduras: Indicators of Public and Publicly Guaranteed External Debt
Including Remittances, 2016-2036 1/
HONDURAS
INTERNATIONAL MONETARY FUND 61
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock2/ In the customized scenario, (i) real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, and rises on average 0.25 percentage points per year to reach 3.5 percent in 2021, staying at this level for the remainder of the DSA period; (ii) financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points; and (iii) the overall deficit of the CPS increases by 2 percent of GDP in 2015 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period.
05101520253020162021202620312036
Baseline
Historical scenario
Most extreme shock 1/
Threshold
Customized scenario 2/f.Debt service-to-revenue ratio
0510152025-2-1-101122320162021202620312036
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)a. Debt Accumulation
05101520253035404520162021202620312036b.PV of debt-to-GDP+remittances ratio
02040608010012014020162021202620312036c.PV of debt-to-exports+remittances ratio
05010015020025030020162021202620312036d.PV of debt-to-revenue ratio
02468101214161820162021202620312036e.Debt service-to-exports+remittances ratio
HONDURAS
Figure A2. Honduras: Probability of Debt Distress of Public and Publicly
Guaranteed External Debt under Alternative Scenarios, Including Remittances,
2016-2036 1/
62
INTERNATIONAL MONETARY FUND
Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
02468101214161820162021202620312036
Baseline
Historical scenario
Most extreme shock 1/
Thresholdf.Debt service-to-revenue ratio
0510152025-2-1-101122320162021202620312036
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)a. Debt Accumulation
0246810121416182020162021202620312036b.PV of debt-to-GDP+remittances ratio
0246810121420162021202620312036c.PV of debt-to-exports+remittances ratio
024681012141620162021202620312036d.PV of debt-to-revenue ratio
024681012141620162021202620312036e.Debt service-to-exports+remittances ratio
Table A3. Honduras: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013-2036
(In percent of GDP, unless otherwise indicated)
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INTERNATIONAL MONETARY FUND 63
Estimate201320142015Average5/Standard Deviation5/2016201720182019202020212016-21 Average202620362022-36 AveragePublic sector debt 1/40.240.940.941.943.243.743.844.042.236.427.9of which: foreign-currency denominated27.728.829.330.732.332.532.133.732.926.514.9Change in public sector debt11.90.70.01.01.40.50.10.2-1.9-1.2-0.5Identified debt-creating flows9.13.5-0.21.51.70.90.60.50.30.31.0Primary deficit 2/6.93.5-0.13.41.90.2-0.1-0.4-0.7-0.6-0.5-0.40.10.20.1Revenue and grants28.929.830.429.629.729.729.930.530.630.630.9of which: grants0.80.80.90.70.70.60.60.60.60.60.6Primary (noninterest) expenditure35.933.330.329.829.729.329.229.930.130.731.0Automatic debt dynamics1.3-0.5-0.31.31.81.31.31.10.80.20.8Contribution from interest rate/growth differential0.7-0.70.00.40.80.40.40.30.20.20.8of which: contribution from average real interest rate1.50.51.41.82.32.02.01.91.91.51.8of which: contribution from real GDP growth-0.8-1.2-1.4-1.4-1.5-1.6-1.6-1.6-1.6-1.4-1.0Contribution from real exchange rate depreciation0.60.2-0.30.91.00.90.80.80.5......Other identified debt-creating flows0.80.50.20.00.00.00.00.00.00.00.0Privatization receipts (negative)0.80.50.20.00.00.00.00.00.00.00.0Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0Residual, including asset changes2.8-2.80.2-0.5-0.4-0.3-0.5-0.3-2.1-1.5-1.5Other Sustainability IndicatorsPV of public sector debt......35.036.036.637.638.036.235.331.224.6of which: foreign-currency denominated......23.424.925.726.426.325.926.121.311.6of which: external......23.624.925.726.426.325.926.121.311.6PV of contingent liabilities (not included in public sector debt).................................Gross financing need 3/6.84.44.73.64.53.66.76.49.58.910.2PV of public sector debt-to-revenue and grants ratio (in percent)……115.3121.6123.2126.8127.1118.4115.7102.079.8PV of public sector debt-to-revenue ratio (in percent) ……118.9124.6126.0129.6129.8120.8118.0104.081.4of which: external 4/……80.286.188.491.089.886.587.271.038.3Debt service-to-revenue and grants ratio (in percent) 5/8.08.219.215.619.217.728.026.635.932.135.5Debt service-to-revenue ratio (in percent) 6/8.28.419.715.919.618.028.627.236.632.736.2Primary deficit that stabilizes the debt-to-GDP ratio-5.02.8-0.1-0.8-1.4-0.9-0.8-0.81.31.30.7Key macroeconomic and fiscal assumptionsReal GDP growth (in percent)2.83.13.63.62.43.63.73.83.83.83.83.83.83.83.8Average nominal interest rate on forex debt (in percent)2.21.73.62.10.63.43.63.63.63.63.63.53.23.03.2Average real interest rate on domestic debt (in percent)14.24.56.35.24.310.415.514.614.913.113.713.713.413.813.4Real exchange rate depreciation (in percent, + indicates depreciation)3.40.6-1.2-2.03.43.0...........................Inflation rate (GDP deflator, in percent)1.45.56.35.72.13.03.14.34.54.54.54.04.54.54.5Growth of real primary spending (deflated by GDP deflator, in percent)13.3-4.5-5.60.45.01.93.22.43.76.14.43.63.84.44.0Grant element of new external borrowing (in percent).........……20.917.118.220.313.42.315.316.916.9...Sources: Country authorities; and staff estimates and projections.1/ Gross debt of the Combined Public Sector2/ As defined in the fiscal accounts3/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 4/ Revenues excluding grants.5/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.Actual Projections
HONDURAS
Table A4. Honduras: Sensitivity Analysis for Key Indicators of Public Debt 2016-2036
64
INTERNATIONAL MONETARY FUND
20162017201820192020202120262036Baseline3637383836353125A. Alternative scenariosA1. Real GDP growth and primary balance are at historical averages3640444951546792A2. Primary balance is unchanged from 20163635363633322514A3. Permanently lower GDP growth 1/3536373936384367B. Bound testsB1. Real GDP growth is at historical average minus one standard deviations in 2017-20183637414340434860B2. Primary balance is at historical average minus one standard deviations in 2017-20183641484847464342B3. Combination of B1-B2 using one half standard deviation shocks3641474847484953B4. One-time 30 percent real depreciation in 20173648495048484648B5. 10 percent of GDP increase in other debt-creating flows in 20173646474746454241Baseline116117121121921109776A. Alternative scenariosA1. Real GDP growth and primary balance are at historical averages116131150163138210218298A2. Primary balance is unchanged from 20161161191201191101068045A3. Permanently lower GDP growth 1/116124129132126127142216B. Bound testsB1. Real GDP growth is at historical average minus one standard deviations in 2017-2018116128140145141144158193B2. Primary balance is at historical average minus one standard deviations in 2017-2018116139161161153151142135B3. Combination of B1-B2 using one half standard deviation shocks116138159162155156159172B4. One-time 30 percent real depreciation in 2017116162167168156156151154B5. 10 percent of GDP increase in other debt-creating flows in 2017116153158158149147139132Baseline1619182827363235A. Alternative scenariosA1. Real GDP growth and primary balance are at historical averages1620193534464665A2. Primary balance is unchanged from 20161620193029393439A3. Permanently lower GDP growth 1/1620193231414158B. Bound testsB1. Real GDP growth is at historical average minus one standard deviations in 2017-20181621203333444255B2. Primary balance is at historical average minus one standard deviations in 2017-20181620203736433948B3. Combination of B1-B2 using one half standard deviation shocks1621203736444152B4. One-time 30 percent real depreciation in 20171622223534484452B5. 10 percent of GDP increase in other debt-creating flows in 20171620214031433948Sources: Country authorities; and staff estimates and projections.1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.2/ Revenues are defined inclusive of grants.PV of Debt-to-GDP RatioProjectionsPV of Debt-to-Revenue Ratio 2/Debt Service-to-Revenue Ratio 2/
Figure A3. Honduras: Indicators of Public Debt Under Alternative Scenarios, 2016-2036 1/
HONDURAS
INTERNATIONAL MONETARY FUND 65
Most extreme shock One-time depreciationSources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. 2/ Revenues are defined inclusive of grants.BaselinePublic debt benchmarkMost extreme shock 1/Historical scenarioFix Primary Balance
05010015020025030035020162018202020222024202620282030203220342036PV of Debt-to-Revenue Ratio 2/
010203040506070809010020162018202020222024202620282030203220342036PV of Debt-to-GDP Ratio
01020304050607020162018202020222024202620282030203220342036Debt Service-to-Revenue Ratio
HONDURAS
Annex II. External Assessment
Overall Assessment
1.
Staff’s assessment is that the external position is moderately weaker than the level
consistent with medium-term fundamentals and desired policies. The assessment is based the
strength of the real effective exchange rate (REER), and strong non-oil import growth. This partly
reflects the strength of the U.S. dollar, and recent depreciations in some trading partners due to terms
of trade shifts. Going forward, the full pass-through to inflation of some partner’s nominal
depreciations may partially reverse the recent appreciation, and planned steady fiscal consolidation
will help improve competitiveness. The impact of these policies would be enhanced by continued
wage moderation and reforms that address weaknesses in the business environment.
Exchange Rate, Current Account, and Investment Position
Table. Honduras: External Assessment
1.
The REER appears to be moderately overvalued. The current account deficit required to
stabilize the net International Investment Position (IIP) is of 3.1 percent, about 2 percentage points of
GDP lower than current medium-term projections. The implied necessary correction in the REER would
be of about 7 percent. Backward-looking approaches that fit observed current account and REER
movements to fundamentals offer similar results. The CA regression finds virtually no overvaluation.
However, this is partly thanks to over-performance in the 2015 fiscal targets.1 The REER regression
predicts a REER about 7 percent lower (i.e. more depreciated), considering Honduras terms of trade,
trade openness, and other fundamentals. It is important to mention, however, that there is no policy
gap; results are driven by non-policy fundamentals.2
2.
Depreciations in trading partners due to oil-related terms of trade shifts prompted a
REER appreciation in 2015. Honduras REER appreciated by 3.3 percent in 2015, partly driving the
bottom line assessment. Going forward, the full pass-through to inflation of the nominal depreciations
experienced by regional trading partners may partly reverse the recent REER appreciation. Available
2015 export data show that Honduras share in world coffee exports (the country’s main export,
accounting for 25 percent of general goods exports) remains strong (see Figure 1(a)). While oil related
imports fell by 3.7 percent of GDP in 2015 (from nearly 10 percent of GDP in 2014 to about 6 percent
1 In 2015, the consolidated public sector deficit was of 1.4 percent of GDP, outperforming the 2.7 percent estimated
under the program. Without this over-performance, the CA gap would have been of -0.5 percent. Closing such gap
would require a REER depreciation of 1.7 percent.
2 The prediction is driven by two main factors. First, Honduras relatively high degree of trade openness, which is
expected to keep domestic prices in check and thus implies a lower REER. Second, based on the country’s existing
distance to the productivity frontier (U.S., Japan and Germany), the model predicts a more depreciated REER through
Balassa-Samuelson.
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Actual CA/YUnderlying CA/YCA/Y normCA/Y gap (Actual or Underlying - Norm)REER gapCA model-6.3-6.70.3-1.1REER model7.1ES approach-5.1-3.1-2.07.0Source: IMF Staff calculations based on External Balance Assessment methodology.Table. Honduras External Assessment
of GDP in 2015), non-oil non-maquila imports increased by 2.4 percentage points of GDP over the
HONDURAS
same period.
Figure 1. Export Shares, Unit Labor Costs, and Productivity
(a)
(c)
(b)
(d)
Sources: International Coffee Organization, IHCAFE, BCH, WEO, Haver, and staff calculations.
3.
Real wages have on average grown in line with productivity. Over 2013-2015, real wages
have grown in line with average productivity (with productivity measured as the ratio of real GDP to
employment) (Figure 1(b)). Average labor productivity grew very fast in the early 2000s, and has grown
in line with main trading partners since 2008 (Figure 1(c)). In particular, when measured in USD, unit
labor costs grew slower in Honduras than in main trading partners during 2010–2014 (Figure 1(d)). In
2015 the terms of trade shift due to lower oil prices prompted depreciations in oil exporters, driving
down USD labor costs in some of Honduras trading partners.
INTERNATIONAL MONETARY FUND 67
0123456
Share of world coffee exportsin percentSources: International Coffee Organization, IHCAFE, and BCH.
84868890929496981001022000200120022003200420052006200720082009201020112012201320142015Real Unit Labor CostsULC=compensation of employees/RGDP
Real unit labor costs (2010=100)Source: BCH,and staff calculations.
607080901001101202000200120022003200420052006200720082009201020112012201320142015Average ProductivityReal GDP/Population, 2010=100
USA
HND
MEXSource: BCH,WEO, Haver, and staff calculations.
607080901001101202000200120022003200420052006200720082009201020112012201320142015Unit Labor Costs in USDULC=compensation of employees/RGDP, 2010=100
USA
HND
MEXSource: BCH,WEO, Haver, and staff calculations.
HONDURAS
4.
The external position is mainly financed by FDI.
About 57 percent of IIP liabilities correspond to FDI; the rest is
mostly debt. Net IIP liabilities have reached 70 percent of GDP
in 2015 (up from 65 percent in 2014), and an adjustment would
be required in order to stabilize this ratio going forward (see
discussion above). However, a large share of (well-diversified)
FDI financing makes the country’s external position relatively
more resilient to negative external shocks.
5.
Improving competitiveness will require addressing weaknesses in the business
environment. Honduras rank in the WEF Global Competitiveness Index improved over the last two
years (from 111th out of 148 countries to 88th out of 140 countries) but remains low. The largest
improvements were in terms of goods markets efficiency (from 91th to 68th), financial market
development (from 59th to 38th), and innovation (from 74th to 55th).3 While there has been progress
in terms of institutions (from 105th to 88th), the ranking remains very low. Most significant
weaknesses include labor market efficiency, infrastructure, health and primary education, and higher
education and training. In the latest (2015) World Bank Doing Business Indicators, Honduras ranks
110th out of 189 countries (18th out of 32 LAC countries). Main weaknesses include the difficulty of
starting a business, getting electricity, paying taxes, enforcing contracts, and resolving insolvency.
Increased security problems in recent years are also having a negative impact on competitiveness, with
crime and theft cited as the most problematic factor for doing business according to the last Global
Competitiveness Report.
Reserves Adequacy
6.
Reserves appear to be adequate assuming there is little exchange rate flexibility, and
ample if the exchange rate regime was deemed to be floating. Two different Fund methodologies
suggest that the level of international reserves is adequate for a fixed exchange rate regime, and
ample if there is exchange rate flexibility.
7.
The assessment methodology designed for emerging market countries compares
reserves to potential net outflows during a stress scenario. The framework compares reserves to
potential net outflows during a balance of payments crisis. These outflows include: reduced export
earnings (10 percent reduction if exchange rate is fixed, 5 if floating); deposit flight (10 percent of
broad money if exchange rate is fixed, 5 if floating); rollover risk (30 percent of short-term external
debt (regardless of exchange rate regime), and 20 percent of other external liabilities if exchange rate
is fixed, 15 if floating). The indicative range for adequate reserves is between 100 and 140 percent
coverage of these potential net outflows. For Honduras, coverage is at near 100 percent if there is no
flexibility in the exchange rate (Figure 2(a)), and 133 percent if floating (Figure 2(b)).
3 Leading gains were on effectiveness of antimonopoly policy, prevalence of trade barriers and business impact of FDI
rules (for goods markets efficiency), regulation of security exchanges and legal rights index (for financial market
development), and government procurement of advance technological products and availability of scientists and
engineers (for innovation).
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INTERNATIONAL MONETARY FUND
FDI inflows by source countryAverage 2013-2015
Mexico
U.S.
Canada
Luxembourg
Panama
UK
Colombia
Guatemala
El Salvador
Other
HONDURAS
8.
An approach designed for credit-constrained economies/LICs evaluates tradeoffs from
holding reserves. The assessment methodology weighs the marginal benefit of holding reserves, in
terms of output gains from reducing likelihood and severity of crises, against the opportunity cost of
holding reserves. The marginal benefit is estimated based on data for 49 countries.4 The cost of
holding reserves is assumed to be equal to the marginal productivity of capital in LICs (6.2 percent).5
This methodology suggests that, if the XR regime is assumed to be fixed, the appropriate level of
reserves is 3.4 months of imports, below the observed level of 4.5 (Figure 2(c)). However, with flexible
XR regime the adequate level of reserves drops to about 1.3 month of imports (Figure 2(c)).
4 See Section IV in International Monetary Fund, “Assessing Reserve Adequacy – Supplementary Information,” February
14, 2011.
5 Arguably, for LICs that have accessed bond markets the cost could be lower, at around the rate of bond issuance (see
pp. 45-7 in International Monetary Fund, “Assessing Reserve Adequacy – Further Considerations,” IMF Policy Paper,
November 2013).
INTERNATIONAL MONETARY FUND 69
HONDURAS
Figure 2. Reserve Adequacy Metrics 1/
(a)
(c)
(b)
(d)
Source: Fund staff calculations.
1/ In panels (c) and (d), ratios are to monthly imports of goods and services, excluding maquila
imports.
70
INTERNATIONAL MONETARY FUND
0.00.51.01.52.02.53.03.54.04.5200420052006200720082009201020112012201320142015ARA Metric Decomposition:
Export revenues (BXGS)
Broad money (FMB_USD)
Short-term Debt (D_SRM)
Other Liabilities (OL)
ReservesHonduras(In Bil of USD)assuming fixed XR regime
0.00.51.01.52.02.53.03.54.0200420052006200720082009201020112012201320142015ARA Metric Decomposition:
Export revenues (BXGS)
Broad money (FMB_USD)
Short-term Debt (D_SRM)
Other Liabilities (OL)
ReservesHonduras(In Bil of USD)assuming floating XR regime
0.00.51.01.52.02.53.03.54.04.55.0LIC reserve template3-month ruleActual reservesReserve Adequacy AssessmentCC methodologyassuming fixed XR regime
0.00.51.01.52.02.53.03.54.04.55.0LIC reserve template3-month ruleActual reservesReserve Adequacy AssessmentCC methodologyassuming flexible XR regime
Source of
Up/
Risks
Downside
Annex III. Risk Assessment Matrix1
Overall Level of Concern (Scale—high, medium, or low)
HONDURAS
Relative Likelihood2
Impact if Realized
Policy Responses
1. Slower growth
in advanced
and/or emerging
economies.
2. Tighter or
more volatile
global financial
conditions.
3. Dislocation in
capital and labor
flows.
4. Persistently
lower energy
prices.
5. Higher
spending
pressures
associated to
upcoming
elections.
6. Continued
institutional
strengthening
and improved
governance.
Low/Medium/High
Medium/High
Protracted period of weaker-than-
expected growth in the U.S. would lower
export demand and remittances,
significantly weighing on activity and
tax revenues (High).
flexibility.
Ease monetary policy, but ensure
inflation expectations remain anchored.
Increase nominal exchange rate
Sharper-than-expected global slowdown in the short-term,
triggered by significant China slowdown (Low in the short-
term, Medium thereafter), or turning credit cycle in EMs
(Medium).
To the extent that structurally weaker growth in advanced
(High) and emerging economies negatively impacts the U.S.,
it could reduce growth in Honduras (Medium).
Surges in global financial market volatility—triggered by
A decline in capital flows to emerging
Medium/High
High/Medium
Strengthen bank capital buffers to cover
macro-financial risks, and gradually
move towards Basel III standards.
geopolitical tensions, revised market expectations on USMP
exit/emerging market fundamentals (Medium), or Brexit
(High)—could reduce capital flows to Honduras, lead to an
increase in cost of government financing, as well as
potentially an increase in cost of funding for the private
sector
Surge in U.S dollar prompted by improving U.S. economic
prospects versus the rest of the world (High).
markets could disrupt foreign credit
lines and reduce banking sector liquidity
(Medium).
An appreciation of the Lempira in line
Monetary tightening increased
exchange rate flexibility, fiscal
consolidation.
with the dollar is likely to adversely
impact the cost competitiveness of the
export sector vis-à-vis the rest of the
world (Medium)."
Ease monetary policy if financial distress
weakens demand and drives inflation
below target.
Medium/High
Medium
Reduced financial services by global/regional banks,
Likely to restrict private remittances
including loss of correspondent banking relationships (High).
inflows.
Security dislocations in the Middle East may create upside
risks for oil prices, along with lower tourist arrivals (High).
Higher oil prices could result in wider
external current deficit, higher inflation,
lower real income and growth.
Strengthening AML/CTF supervision of
the banking sector and effectively
implementing fit and proper
requirements for beneficial ownership
and control of financial institutions.
Increase exchange rate flexibility.
Monetary policy should be tightened to
contain second round effects of higher
oil prices.
Triggered by supply factors reversing only gradually.
For Honduras, persistently low global oil
Build fiscal and monetary buffers.
High
Low
prices are likely to be accompanied by
lower prices for coffee and bananas,
thereby offsetting the gains from lower
energy prices. Therefore, from an overall
perspective, it is likely to yield slower
growth.
Medium
Inadequate application of the FRL.
High
This could result in substantial loss in
Monetary tightening and increased
policy credibility and translate into
lower investment/growth and high
unemployment.
exchange rate flexibility."
Medium
High
Increased exchange rate flexibility.
The recent adoption of the fiscal responsibility law, coupled
with ongoing reform of key state institutions, along with the
steadfast fight against corruption has given hope that
improved governance is taking root in Honduras
Investment, productivity and potential
growth would be positively impacted.
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view
of the staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline.
2 In case the baseline does not materialize.
INTERNATIONAL MONETARY FUND 71
HONDURAS
Annex IV. The Trans-Pacific Partnership and Honduras
The Trans-Pacific Partnership (TPP), a major trade deal between 12 Pacific Rim nations,
includes major trade partners and competitors of
Honduras. The TPP was signed in February 2016, and is
currently pending domestic ratification by its members. The
agreement covers frontier issues such as services,
investment, government procurement, intellectual property,
environmental standards and competition policy, and would
entail substantial reductions in tariff and non-tariff barriers
among its members. Together, TPP members account for
about half of Honduras non-maquila exports, and over
three-fourths of maquila exports. Importantly, while the TPP
includes large exporters of textiles and coffee, the challenges
to Honduran exporters are likely to come in the textiles
sector.1
The TPP can potentially challenge the textiles sector, but Honduras still has some advantages.
Substantial tariff reductions in textiles would come into effect immediately once the TPP is ratified.
This would represent an erosion of preferences vis-à-vis partners with which Honduras has a regional
trade agreement, most notably the U.S.––the main destination for maquila exports.2 Honduras faces
intense competition from Vietnam, especially in synthetic textiles and in several of its other main
apparel exports to the U.S. (Figure 1). That said, Honduras still possess several advantages that could
lessen the impact of TPP (Henn et al., 2016).3 These include; (i) its geographic proximity to the U.S.
market, which provides a key competitive advantage to Honduras, considering lower-inventory
operations under increasingly prevalent e-commerce sales in the textile market; (ii) the tariff phase-
out periods, which for some of Honduras main exports extend up to 10 years after TPP’s entry into
force; and (iii) TPP’s rules of origin, which after an initial transition period will require all TPP
producers to source all inputs from TPP countries to apply for preferences, and so for some TPP firms
there is likely to be an adjustment period, during which Honduras could maintain its competitive
position.
1 The impact on the agricultural sector is expected to be small, as the U.S. (the only TPP member buying significant
amounts of Honduran coffee) already has zero tariffs for virtually all coffee products and all countries.
2 About 77 percent of maquila products were exported to the U.S. in 2015, and 82 percent of all maquila exports were
textile products. The trade agreement with the U.S. is in the context of the CAFTA-DR agreement, in effect since 2006.
Regional trade agreements are also in force with other three TPP members (Chile (2008), Mexico (2013), and Canada
(2014)).
3 Henn, C., S. Ahmed, M. Appendino, D. Cerdeiro and M. Saleh (2016), “A Conceptual Framework to Assess the Trans-
Pacific Partnership,” International Monetary Fund, mimeo.
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RankCountryShare in U.S. textile imports 1/1China37.62Viet Nam8.63India6.54Mexico4.75Indonesia4.76Bangladesh4.67Pakistan2.88Honduras2.49Cambodia2.310Italy1.8Source: UN Comtrade.1/ Average 2013-2015, in percent.Top 10 Textile Exporters to the U.S.
HONDURAS
Figure 1. TPP and Honduras Textile Exports to the U.S.
Sources: USTR, World Bank WITS, UN Comtrade, and Staff calculations. Notes: B5, US6-11, refer to U.S. tariff phase-
out schedules for textiles. See e.g. http://otexa.trade.gov/PDFs/OTEXA_Webinar_TPP_Feb_2016.pdf
The Honduran authorities have expressed their interest in joining the TPP. TPP provisions could
drive large productivity gains for its developing members as they catch up with the productivity
frontier through knowledge spillovers associated with FDI. For Honduras, it could also provide the
opportunity to expand trade on the extensive margin, diversifying both the product base and the
export markets. For instance, Japan’s agricultural import tariffs will be substantially reduced under
TPP (12-percent tariffs on roasted coffee will be eliminated upon entry into force), pointing to a
potential source of gains from joining the agreement and developing new products and new
markets.4 Note that while the integration of textile value chains with the U.S. could reduce
adjustment costs, there could potentially be some challenges in terms of the capacity to implement
and enforce some of the provisions of the agreement.
4 Honduras total coffee exports to Japan are currently small, amounting to less than $1mn in 2015.
INTERNATIONAL MONETARY FUND 73
00.511.505101520Competition in U.S. Apparel MarketEach dot corresponds to an apparel product, HS 6-digit levelShare of product in Honduras apparel exports to USVietnam'sshare in US imports of apparel productCotton T-shirts(US6)Fibersweatshirts(US6/EIF)Cottonsweatshirts(B5/US6/EIF)Stockings(B5/US6)Non-cotton T-shirts(US6/EIF)Women cotton trousers(Alreadyfree/US7/EIF)
Already Free4%
On entry into force68%
B59%
US63%
US72%
US81%
US91%
US105%
US117%U.S. TPP Tariff Phase-Out ScheduleApparel (HS 61 and 62)
Appendix I. Letter of Intent
October 13, 2016
HONDURAS
Ms. Christine Lagarde
Managing Director
International Monetary Fund
Washington, DC 20431
Dear Ms. Lagarde,
After 2½ years in office our government is succeeding in improving domestic security, stabilizing the
economy, institutionalizing fiscal prudence with the approval of the Fiscal Responsibility Law (FRL),
and paving the way to combat corruption. These ambitious policies are creating the foundations for
sustainable and inclusive growth.
Economic performance in 2015 was better than expected. Real output grew at 3.6 percent while
improved macroeconomic stability plus lower domestic gasoline prices helped to reduce headline
inflation to 2.4 percent (eop), much below the inflation target of 4.75 percent. The central government
and the combined public sector deficit targets were met by ample margins––deficits reached
3.1 percent (target 3.8 percent) and 1.5 percent (target 2.7 percent) of GDP, respectively. NIR
increased by US$307 million as private capital inflows exceeded program projections owing to
improved investor confidence. That said, the NDA target for end-December 2015 was missed by a
small margin, owing to faster than projected growth in currency issue.
Notwithstanding the economic activity acceleration in 2015, we are aware that continued efforts are
required to keep macroeconomic stability, enhance credibility and transparency of public policies, and
advance the conditions for sustainable and inclusive economic growth.
We remain fully committed to the guidelines set out in the November 2014, April and November 2015
Memoranda of Economic and Financial Policies (MEFP). The attached MEFP discusses the key
elements of our economic program for 2016–17.
The economic outlook for the remainder of 2016 is positive. Real output growth is projected to grow
by 3.6 percent in 2016, supported by the gradual implementation of the law of social protection that
seeks to reduce poverty and income inequality, additional infrastructure investment and a supportive
monetary policy stance. After the significant fiscal over-performance of 2015 and in line with the
existing program and the FRL approved last April, the fiscal situation is expected to marginally ease to
accommodate higher infrastructure spending. Social spending will remain constant as share of GDP
increasing the quality of total public spending and maximizing its impact on inclusive growth and
poverty reduction. Consistent with expanding real sector activity, credit to the private sector would
grow by 10 percent in line with a sustainable pace of financial deepening. While output is expected to
remain marginally below potential, inflation is projected to pick up following the increase in energy
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INTERNATIONAL MONETARY FUND
HONDURAS
costs, but remain in line with the inflation objectives. Following the reduction of 25 bp in the policy
rates adopted last June, monetary policy is expected to maintain inflation under control and the
currency to be consistent with the objective of strengthening the external position. NIR are projected
to rise to 4.7 months of imports.
The policies set forth in the attached supplement to the MEFP aim to bolster the fiscal and external
position, and move forward with structural reforms to boost competitiveness and inclusive growth. In
particular, the MEFP for 2016–17 seeks to (i) effectively implement the FRL, (ii) establish a new tax
administration agency to consolidate the progress so far achieved on tax collection, (iii) advance with
the gradual implementation of the law of social protection in a fiscally sustainable manner, (iv)
continue with the electricity sector reform and accelerate efforts to reduce non-technical losses, (v)
modernize the operational monetary policy framework by enacting reforms to the law on the Central
Bank of Honduras in line with Fund recommendations to start the transition process towards inflation
targeting and a more flexible foreign exchange rate regime, and (vi) protect financial stability by
enhancing the financial resolution framework and strengthening macroprudential regulations on
household indebtedness.
We remain confident that the policies set forth in the attached supplement are adequate for a
successful implementation of the program. Nonetheless, the government stands ready to take
additional measures that may be required. The government will consult with the Fund on the
adoption of such measures, and in advance of revisions to the policies contained in the MEFP and the
attached supplement of the MEFP in accordance with Fund’s policies on such consultations. The
government will also continue to provide relevant information to monitor performance and reviews of
the program on a timely basis. Given the minor deviation from the end-December 2015 NDA
performance criteria, the corrective measures taken to address the deviation from the net-lending by
public pension funds program target for end-June 2016, and the actions taken to clear the temporary
increase in domestic arrears from the National Electricity Company (ENEE) (continuous performance
criteria), we request a waiver of these nonobservances. We also request modification of the end-
December 2016, PCs on NDA and the present value of net external debt contracted, and the
completion of the third and fourth reviews. We additionally request a rephasing of the SBA to take
into account the increase in Honduras’s first credit tranche as a result of the increase in Honduras’s
quota under the Fourteenth General Review of Quotas.
We authorize the IMF to publish this Letter of Intent, its attachments and the related staff report.
Sincerely yours,
/s/
Wilfredo Cerrato
/s/
Manuel de Jesús Bautista Flores
Chief Economic Cabinet and Finance Minister
President of the Central Bank
Attachments
I. Memorandum of Economic and Financial Policies
II. Technical Memorandum of Understanding
INTERNATIONAL MONETARY FUND 75
HONDURAS
Attachment I. Memorandum of Economic and Financial Policies
for 2016–17
1.
Honduras has made steady progress in its efforts to bolster macroeconomic stability.
Since taking office in January 2014, President Hernández’s administration embarked on a sound
homegrown economic program, supported later by the December approval of a Stand-By
Arrangement (SBA) and an arrangement under the Standby Credit Facility (SCF). Strong program
implementation resulted in over performance on fiscal targets owing to higher revenue, strict
spending controls, and sustained progress on reforming the electricity sector. Despite the fiscal
consolidation, social and security spending have increased to reduce poverty and income inequality
and improve the domestic security situation. Structural reforms have been broadly on track (Tables 1
and 2).
2.
We remain fully committed to the objectives set forth in the November 2014
Memorandum of Economic and Financial Policies (MEFP). These measures underpinning these
objectives will be complemented with the policies described in this MEFP to ensure the program’s
goals remain within reach. The MEFP for 2016–17 seeks to (i) effectively implement the FRL,
(ii) establish a new tax administration agency to consolidate the progress so far achieved on tax
collection, (iii) advance with the gradual implementation of the law of social protection in a fiscally
sustainable manner, (iv) continue with implementation of the electricity sector reform and accelerate
efforts to reduce non-technical losses, (v) modernize the operational monetary framework by starting
the transition process towards adopting inflation targeting and a more flexible foreign exchange rate
regime, and (vi) protect financial stability by enhancing the financial resolution framework and
strengthening macroprudential regulations on household indebtedness.
Macroeconomic Developments, Program Implementation and Outlook
3.
Economic recovery consolidated in 2015. Real GDP growth accelerated for a second
consecutive year to 3.6 percent (3.1 percent in 2014 and 2.8 percent in 2013) driven by a boost in
investment and the recovery in private consumption—which responded positively to a reduction in
gasoline prices and strong remittances inflows. Sound macroeconomic policies and lower domestic
gasoline prices helped to reduce headline inflation, which at the end of 2015 was at 2.4 percent,
below the inflation target of 4.75 percent. The central government and the combined public sector
deficit targets were met by ample margins––deficits reached 3.1 percent (target 3.8 percent) and
1.4 percent (target 2.7 percent) of GDP, respectively. This over-performance reflected vigorous
revenue collection––mainly of value added and income taxes––as well as expenditure control,
including outlays on wages and salaries. Private sector balance sheets strengthened and the financial
system remained sound while credit dollarization fell 1½ percentage point to 33.2 percent, in
response to tighter regulations on foreign exchange exposure. The external current account deficit
widened to 6.3 percent of GDP, higher than the 6.0 percent of GDP foreseen in the program, because
of weaker global prices of exports. That said, NIR increased by US$307 million as private capital
inflows exceeded program projections supported by improved investor confidence reflected in the
Honduras international bond spreads over U.S. treasuries.
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4.
In 2016, output growth is expected to remain steady, amid low inflation, steady credit
growth and an increase in net international reserves. Real output growth is projected to grow by
3.6 percent in 2016, supported by increased public sector infrastructure investment and a supportive
monetary policy stance. After the significant fiscal over-performance of 2015, and in line with the
existing program and the FRL, the fiscal situation is expected to marginally ease to accommodate
planned investment in infrastructure. Consistent with expanding real sector activity, credit to the
private sector would grow by 10 percent in line with a sustainable pace of financial deepening. While
output is expected to remain marginally below potential, inflation is projected to pick up following the
increase in energy costs, but remain low and in line with the inflation target. Following the reduction
of 25 bp in the policy rates adopted last June, monetary policy will adjust as necessary to maintain
inflation under control and the currency to continue to be consistent with the objective of
strengthening the external position. Notwithstanding an expected marginal narrowing of the external
current account deficit to 5.8 percent of GDP, due to better terms of trade, net international reserves
are projected to rise to 4.7 percent of imports, consistent with achieving the end-June and end-
December targets.
5.
Fiscal performance has been consistent with most program targets during the first
semester of 2016. The central government had a deficit of 0.2 percent GDP supported by vigorous
tax collection and expenditure control including in wages and salaries. The nonfinancial public sector
posted a surplus of 1.5 percent of GDP as pension contributions rose and the electricity company
ENEE improved its operational balance following the rationalization of redundancies implemented
thus far.
6.
The fiscal outlook for 2016 remains positive. With vigorous tax revenues growth
(15 percent annual growth cumulative through July) and spending under control, we assess that most
of the December 2016 fiscal targets are achievable. The ENEE deficit is expected to decline slightly to
0.2 percent of GDP (from 0.3 percent of GDP in 2015) as the operational margin continues to improve.
7.
Monetary policy continued to evolve in line with program objectives. We lowered the
policy rate by 25 basis points in June 2016, in the context of low stable inflation and growing
international reserves. At the same time the central bank stepped up its efforts to absorb additional
liquidity from capital inflows while keeping under control private sector credit growth. In addition, the
deceleration of banks’ credit in foreign currency contributed to reduce risks in the banking system
from unhedged borrowers following the introduction of additional measures to reduce this risk.
These actions have exerted downward pressure on lending rates and contributed to favorable
monetary and credit conditions.
8.
Progress in the structural benchmarks has been mixed. Congress approved the FRL in
April 2016. Last February, we submitted to congress a draft law of the Social Security Institute (IHSS)
that seeks to strengthen its actuarial position and improve its governance. Approval by congress of
this law is still pending and we will ensure it is consistent with the fiscal objectives of the program
before enacting it. We requested an ambitious TA program on the monetary and foreign exchange
policies from the Fund to design a plan for a gradual removal of surrender requirements in line with
INTERNATIONAL MONETARY FUND 77
HONDURAS
the objective of adopting an inflation targeting regime. We rescheduled the audit of public sector
arrears owed to private creditors and will formulate a plan to clear them by December 2016 (see
below).
Fiscal Policy
I. Fiscal Program for 2016
9.
Our 2016 fiscal program seeks to effectively implement the FRL and execute efficiently
the high-quality infrastructure projects underway. The revised program, targets central
government and NFPS deficits of 3.4 and 1.5 percent of GDP, respectively for year end. The 2016
fiscal effort, measured by the primary balance of the NFPS, declines by 0.3 percent of GDP owing to
the implementation of targeted infrastructure projects. Social spending will remain constant as share
of GDP and strive to increase the quality of total public spending, seeking to maximize its impact on
inclusive growth and poverty reduction.
II. Revenue
10.
Tax revenues. We will continue to mobilize revenues as committed in the program. Tax
revenues are expected to remain constant as a percentage of GDP once the one off adjustments in
2015 are netted out. We have submitted to congress a tax code aimed at simplifying tax collection.
We will ensure that the new tax code, on a continuous basis, remain consistent with the international
best practice. In particular, the new tax code will include instruments to ensure effective monitoring, as
well as an appropriate regime of penalties and sanctions for tax fraud. We will also facilitate the
dissemination of tax laws by compiling all of the relevant decrees and laws in a single text.
11.
Tax authority reform. We are implementing an overhaul of the tax authority and have created
a new institution, Servicio de Administración de Rentas (SAR). To protect the tax base during this
transition, we have strengthened the large taxpayer unit and created a new unit to verify invoicing
procedures which is now implementing a plan to strengthen tax enforcement. The SAR will function
within a unified operational program (POA) by March 2017 (structural benchmark, March 2017). At the
same time, customs reforms continue and we have established a detailed mapping of the business
process and adopted new operating manuals in Puerto Cortés to enhance collection of import duties
in gasoline and bulk freight (structural benchmark, June 2016).
III. Spending
12. Wage bill. We reaffirm our commitment to keep the wage bill under control. For 2016 the
wage bill of the Central Government is expected to be 8.4 percent of GDP and for the NFPS at 11.8
percent of GDP (targeting a nominal increase in the wage bill of 5 percent). We have made significant
advances in several initiatives to control the payroll growth. Currently, all payrolls in the central
administration are executed through our integrated financial management information system (SIAFI)
which is linked to the public employment management system (SIREP). We finished the vacancies,
jobs and skills audit in line ministries with assistance of the World Bank. The audit will be used by the
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civil service reform commission to rightsize the central government wage bill. We expect additional
savings and productivity gains once the recommendations of the audit are implemented.
13.
Public investment. Considering the fiscal space created by the faster than anticipated
fiscal consolidation and the need to boost employment growth with high-impact spending, we
plan to allocate additional resources to increase public investment. The additional investment
spending for 2016 amounts to 0.4 percentage points of GDP and will be allocated to fund several
infrastructure projects (see TMU, Paragraph 14). These projects are expected to enhance
employment and growth and have already been declared as priority projects by the Public
Investment Management System (SNIP). If any of these projects are not implemented as scheduled,
the associated resources will be saved and our fiscal targets will be adjusted accordingly. To help
strengthen investment outcomes, we have requested technical assistance from the Fund on
strengthening our public investment management system.
14.
Financing. We successfully re-profiled about US$400 million in 2015, extending the half-life
of domestic debt from 3.3 to 4.3 years at lower interest rates supported by the ample liquidity in the
domestic financial system. We remain open to the possible tapping of the international capital
markets to undertake liability management operations to smooth debt service. Our extended
investment plan will require about US$750 million for 2016–17 in external financing which we plan
to obtain mainly from multilateral institutions. Given the strong program implementation we expect
to obtain this financing at concessional terms.
IV. Public Financial Management
15.
Fiscal Responsibility Law (FRL). The enacting of the FRL has institutionalized the hard-
won fiscal consolidation achieved thus far. This law embodies accountability, transparency, and
stability principles consistent with international best practices. It contains numerical rules that we
expect to be fully enforceable in 2019. These are: a limit on the public sector deficit of 1 percent of
GDP and a limit on the growth rate of current spending equal to the average of the real growth
rate over the last 10 years plus current headline inflation. The law also includes a transitory clause
defining the transition path to achieve such targets, which are fully consistent with our program’s
fiscal targets. We will elaborate the 2017 budget based on the law’s parameters and include the
medium-term fiscal framework (MTFF) documentation where the consistency of the draft budget
and the FRL rules is explained. We will also disseminate between spending units and other
stakeholder the importance of the MTFF as budget and planning control instrument to prevent
slippages and initiatives that could undermine it.
16.
Transparency and accountability. One of the key components of the FRL is the
strengthening of transparency and accountability of public spending. To this end the law states that
all trust funds will operate through the budget. We plan to fully implement the law ensuring that: (i) all
trust funds will be managed under the Treasury Single Account (TSA), (ii) any spending from trust
funds should comply with the same spending controls than regular budgetary spending, and (iii) the
operations of trust funds are disclosed and properly consolidated into the general government
INTERNATIONAL MONETARY FUND 79
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accounts (structural benchmark March 2017). During the implementation process, we remain
committed with the dissemination of a national registry of all trust funds funded by public resources
(structural benchmark, June 2016).
17.
Treasury single account. We will continue strengthening the operational coverage and
performance of the TSA with technical assistance from CAPTAC-DR. While implementing these TA
recommendations, we will work on a special module that allows the operation of trust funds through
the TSA.
18.
Settlement of Arrears. We are focusing the audit on claims that have proper
documentation (verification notes also known as F-01). Once the audit is finalized, we will present a
plan to settle all validated claims. The audit of all domestic arrears to private creditors, estimated at
2½ percent of GDP at end-2015 had to be stopped as the firm selected to conduct the audit was
blacklisted by the World Bank. A new auditor firm will complete the audit later than envisaged and
therefore we request an extension to complete the audit by December 2016 (currently set for end-
June 2016). Once the audit is completed, we will discuss with creditors and the Fund the best
strategy to clear them.
19.
Implementing a sound PPP framework. In December 2014 a unit was created in the
Ministry of Finance in charge of assessing fiscal risks stemming from PPPs. The unit has now
received extensive training and technical support from the IADB and the Millennium Challenge
Account. For fiscal reporting, as stated in the law, we will continue preparing fiscal statistics based
on the international accounting standard recommended by the International Public Sector
Accounting Standards Board (IPSASB). The unit will ensure that PPP projects will not be approved if
they compromise the fiscal targets of the program.
20.
Public pension funds net loans to public workers. In recent years, public pension funds
have been increasing their financial resources due to higher contribution rates and a wider tax base.
This fact combined with the limited availability of appropriate investment opportunities have
increased their appetite to offer loans to their affiliates. To ensure the financial sustainability of the
pension funds, however, we have adopted measures to limit the risk of these loans by limiting the
increase in lending net of repayments through the duration of the program. For 2017, we will issue a
new investment guideline, prepared by CNBS, that will ensure that public pension funds be
managed in a prudent and sustainable manner in line with best international practices.
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V. Public Enterprises
ENEE
21. We will continue to strengthen ENEE’s financial position. As indicated in our April 2015
MEFP, we expect that the financial impact of the rationalization measures to bear fruit over time. In
2015 ENEE’s deficit shrank by 1 percent of GDP to 0.3 percent of GDP. We will continue with our
policy of zero subsidies to finance the company (continuous structural benchmark). During the first
6 months of 2016, ENEE’s domestic arrears temporarily increased, as it transited to a new
management team. Since then, we have adopted appropriate controls that have reduced these
arrears by half, and commit to clearing the remainder by end-December 2016. Going forward, we
will take administrative measures aiming to prevent the recurrence of this problem. The 2014 and
2015 financial audits are still pending.
22.
Electricity distribution losses. The reduction in the electricity losses is the main pending
issue in our reform agenda but we are determined to implement an aggressive plan to reduce non-
technical electricity losses. Supported by a bidding process we selected in February 2016 a
management company for a 7-year period that will help to collect unpaid bills, reduce non-
technical losses, maintain and upgrade the distribution network, and streamline costs. Given the
delays in the company selection process we commit to reduce non-technical losses by 1 percent in
2016 and up to 17 percent during the next 6 years.
Monetary, Exchange Rate, and Financial Sector Polices
23. Monetary policy will remain focused on price stability and protecting the external
position. We are aiming to keep inflation within the 4.5±1 percent uncertainty band in 2016–17.
Despite an uncertain external environment but supported by the recent upgrade of the sovereign
risk rating, we kept unchanged our target of net international reserves (NIR) of US$3,005 million for
end-December 2016 (albeit increasing reserve coverage to 4.7 months of imports, up from 3.8
months in the original program). The net domestic assets ceiling is consistent with a prudent
expansion of bank credit to the private sector to support the growth objectives of the program.
Having said that, should the achievement of the inflation target be threatened we stand ready to
adjust monetary policy as appropriate.
24. We will continue to move ahead with our plans to improve the operational framework
for conducting monetary policy. The BCH introduced daily liquidity auctions last October. To
enhance further the monetary operations we plan to: (i) improve further its liquidity forecasting and
management; (ii) develop the interbank market ; (iii) increase the signaling content of the monetary
policy interest rate (TPM); (iv) improve coordination on liquidity management with the Ministry of
Finance supported by the recent formalization of information exchange agreement with the Central
Bank and (v) continue the phasing out of the banks’ use of government bonds to meet a portion of
reserve requirements with the aim to eliminate this practice during the program period. The BCH
has not issued any new authorizations to allow government bonds to be held as reserve
INTERNATIONAL MONETARY FUND 81
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requirements. To guide our future reforms efforts, we intend to approve a strategic plan to
modernize monetary policy (structural benchmark, end-October 2016). This plan would include
announcing inflation targeting as the nominal anchor, a new communication strategy and a road
map for the further development of the interbank money and foreign exchange markets. In line with
this, we also plan to prepare regulations to create a system of primary dealers in the domestic
money market in line with international best practices.
25.
Our exchange rate policy will continue to be consistent with the objective of
strengthening the external position. With the view to gradually move towards inflation targeting
and a more flexible exchange rate arrangement, we have requested an extensive technical assistance
program on monetary operations from the Fund. As part of this process, starting in January 2017, we
plan to reduce by 10 percent obligations of authorized dealers to sell their FX proceeds to the
central bank (structural benchmark, Prior Action 5th Review). Building upon the TA on surrender
requirements last November, starting in October 2016 we will begin issuing regulations to establish
a foreign exchange rate market (Structural benchmark end-December 2016). The flexibilization of
the FX market will be supported by a code of conduct for market participants, transparent criteria for
FX transactions including reporting arrangements for FX dealers, strengthened guidelines for banks
FX exposures, enhanced reporting arrangements for authorized dealers and the elimination of the
system of commissions.
26.
The modernization of the monetary policy framework includes strengthening
institutional arrangements to adopt an inflation-forecast targeting framework. The
modernization of monetary policy will benefit from enhancing financial supervision and financial
market infrastructure as guided by financial sector stability reviews and complementary technical
assistance. In this regard, we plan to enhance the bank's governance framework by amending the
BCH Law (structural benchmark) to align it with international best practices and safeguards
assessments recommendations. In addition, by end-2016, we will approve a plan to adopt
International Financial Reporting Standards (structural benchmark, end-December 2016) for
FY2017. We will request IMF-TA to help the BCH in achieving these objectives.
27.
Recapitalization of the central bank. In December 2014, we started implementing a
multiyear plan to recapitalize the central bank (adopted by congress in May 2014) through non-
negotiable bonds bearing a positive real interest rate. As scheduled, the second issuance took place
in December 2015 for L3,000 million, with an 8 percent coupon. The recapitalization program
comprises three additional annual issuances of L3,000 million at an 8 percent coupon with the next
issuance scheduled for December 2016.
28. We are taking measures to reduce risks in the financial sector. With technical assistance
from LEG and MCM, we aim to strengthen the legal framework for bank resolution with a substantive
reform currently before Congress, and upgraded an early warning committee to perform as a
Financial Stability Council. These measures complement previous actions to enhance financial
stability. In addition, we adopted higher capital requirements for foreign currency borrowing by
unhedged agents. Since mid-2015, we have adjusted, for lending to unhedged agents, the risk-
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weighted capital asset ratios to 150 percent for mortgage loans where debt-to-collateral ratio
exceeds 85 percent and 175 percent for consumer loans (including credit cards). This regulation is
currently being implemented. We will continue to monitor household indebtedness and adopt
regulations to keep it within prudent margins and establish programs to increase financial literacy.
In addition, since 2015, we began issuing guidelines to strengthen pension funds’ investment
policies and governance according to international best practices. This should safeguard pension
fund resources while achieving adequate returns. In September 2016, we continued to implement
our plans for improving institutional governance and stream the operations of the development
finance agencies with the merger of the agricultural development bank, BANADESA, and the
Honduran Bank for Production and Housing.
Structural Reforms
29.
Electricity sector. We continue to adopt measures to overhaul the electricity sector. A new
electricity sector law was enacted in 2014 to promote a more efficient, open and transparent
electricity sector. The law also allows for greater private sector participation in transmission and
distribution. Private sector companies already participate in electricity generation thus increasing
competition and efficiency. We seek to complete the full implementation of the law in 2017. In June
2016, as first step in this process, the regulatory commission (CREE) established a new tariff scheme
based on cost recovery and by end-2016 will issue new regulations to improve the functioning of
the electricity market.
30.
Social protection framework law. With the enactment of the social protection framework
law, we expect to increase the coverage of the social safety net and reach universal health coverage
over the next years. We commit to work speedily on all complementary regulations and bylaws to
ensure it complies with the fiscal targets of the program. Specifically, (i) we will clarify that no form
of tax benefit is needed for the implementation of the provisions of the law, (ii) we commit to
working with the Fund in designing the changes in the capital market required for the proper
operation of the new private pension fund scheme, and (iii) we will seek to improve the governance
of the investment funds.
31.
Streamlining tax expenditures. At 6½ percent of GDP, Honduras has one of the largest
stocks of tax expenditures in the region. Some of these have been ineffective to achieve our
targets of fostering inclusive growth and reduce poverty. As stated in the LPS we will gradually
eliminate them to finance the implementation of the law. We are committed not to renew any tax
benefit scheduled to expire during the remainder of the program (continuous benchmark). In the
FRL we included provisions to modernize the tax expenditure management system by adopting a
platform to administer tax incentives and to improve the control of the benefits granted. We will
include an annual estimate of tax expenditures in the budget bundle to be submitted to Congress.
32.
Social Security Institute reform. Last February, we submitted to congress a draft law of
the Social Security Institute (IHSS) that seeks to strengthen its actuarial position and improve its
governance. Approval by congress of this law is still pending and we will ensure it is consistency with
INTERNATIONAL MONETARY FUND 83
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the fiscal objectives of the program before enacting it. The social protection framework law has
increased the contribution rate from 3.5 to 6.5 percent. Resources from the Private Contributions
Scheme (RAP) were used for this and therefore it was neutral to workers and employers. We will
take the necessary actions to place the IHSS on a sound financial footing by focusing on
maintaining international competitiveness of the contribution rate.
33.
The efficiency of social spending. With the ambitious path of fiscal consolidation stated
in the FRL and limited room on the revenue side, increasing the efficiency (value for money) of
health and education spending should be the primary way to increase the delivery of public
services. To that end, we have noticed that both sectors have room for efficiency savings. We will
conduct a comprehensive study of the different compensation schemes of the education and
health wage bills by benchmarking them against other public employees and private sector
comparators (structural benchmark, June 2017).
Program Monitoring
34.
Program Monitoring. The program will be subject to semi-annual reviews, and will be
monitored through performance criteria, indicative targets, and structural benchmarks, as set out in
Tables 1–3.
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I
N
T
E
R
N
A
T
I
O
N
A
L
M
O
N
E
T
A
R
Y
F
U
N
D
8
5
Table 1. Honduras: Performance Criteria
(Cumulative flows; millions of Lempiras, unless specified)
H
O
N
D
U
R
A
S
End-Jun.Prog.AdjustedActualProg.Rev. Prog.AdjustedPrel.StatusProg.AdjustedPrel.StatusProg.Rev. Prog.Prog.QUANTITATIVE PERFORMANCE CRITERIAFiscal targets 2/Overall balance of the public sector (ceiling) 3/ 4/-5,256-3,3453,461-14,283-11,700-8,933-6,399met-3,000-1,8244042.6met-9,600…-4,000Overall balance of the central government (ceiling) 4/-6,870-4,959-707-17,873-16,900-14,133-13,750met-6,500-5,324-811met-16,300…-8,000Overall balance of ENEE (ceiling)) -1,491…-395-3,353-1,648…-1,397met-750-404met-1,000…-600Net Lending of the Combined Public Sector (ceiling) 5/…………680…544met2002,420not met4001,700 500Public debt targets 6/Contracting and guaranteeing of new non-concessional loans (continuous ceiling, in million US$)600…80600600…336met…………………Present value of new external debt contracted (continous ceiling, in millions US$) 7/…………………met52052018met520240260Increase in the stock of arrears of ENEE (continuous ceiling) 8/0…00……0met0…2,327not met……0Accumulation of new external arrears (continuous ceiling, in million US$)0…00……0met0…0met……0Monetary targetsNet international reserves of the Central Bank (floor, in million US$)2,3902,4062,8482,4112,7302,7832,800met2,8592,8712,935met3,0053,0053,120Stock of net domestic assets of the central bank (ceiling) 9/-27,001-27,345-38,706-22,454-28,625-29,743-29,638not met-35,342-35,588-35,641met-31,760-30,723-36,751Indicative targets 2/Wage bill of the central government (ceiling)18,850…18,45939,24838,456…38,441met19,100…19,096met39,800…21,075Social spending (floor)2,384…3,9857,3339,000…9,898met3,000…4,934met9,600…3,500Operating revenue-to-spending ratio of ENEE (floor)0.97…1.040.971.03…1.06met1.00…1.07met1.05…1.051/ Definitions as specified in the Technical Memorandum of Understanding. 2/ Cumulative starting in January of the correspondent year.3/ Corresponds to the combined public sector for test dates end-June 2016 and end-December 2016 and the nonfinancial public sector thereafter.4/ Excluding capital grants resulting from debt cancellation.5/ Stock of gross lending operations of public pension funds to remain constant as of 09/12/2016.6/ Cumulative starting in December 2014. Targets on non-concessional debt and external arrears are for the public sector.7/ This PC will apply continuously from June 30, 20168/ As stated in the Technical Memorandum of Understanding paragraph 23. 9/ Using the program exchange rate of L21.1066 = 1US$.End-Jun.End-Dec.201720152016End-Jun.End-Dec.
HONDURAS
Table 2. Honduras: Structural Benchmarks
Measure
Rationale
1. Adjust average electricity tariffs by 2.5 percent
during 2015 to reflect past cost increases; further
adjust tariffs to incorporate current changes in
costs.
2. Approval of legislation to strengthen the PPP
framework.
3. Repeal legislation allowing the issuance of
government guarantees for debt contracted by
private companies involved in PPP projects.
Promote a more efficient, open and
transparent electricity sector.
Improve financial position of ENEE
by aligning its tariffs with
underlying costs
Eliminate fiscal risks stemming
from PPPs. Improve transparency
and accountability of fiscal policy
Eliminate fiscal risks stemming
from PPPs. Align incentives of
private companies with productive
activities.
4. Conduct a census of public employees, with
the aim of identifying and cancelling redundant
positions during 2015.
Strengthen the fiscal position by
making the public sector more
efficient and eliminate fraud
5. Take actions sufficient to achieve savings in
ENEE’s wage bill as indicated in paragraph 11 of the
MEFP of the November 2014 MEFP.
6. Submit to congress legislation to reform the
Social Security Institute (IHSS) to strengthen its
actuarial position and improve its governance.
Eliminate fiscal risks stemming
from ENEE by improving its
operational margin
Strengthen financial position of the
IHSS
7.
In consultation with staff, prepare a plan to
address the financial difficulties of HONDUTEL.
Restore financial sustainability of
the company
8. Submit to congress legislation to reform the
Social Security Institute (IHSS) to strengthen its
actuarial position and improve its governance.
Strengthen financial position of the
IHSS
9. Approval of the law reforming the IHSS
consistent with the fiscal objectives of the program
Strengthen financial position of the
IHSS
10. Present a program for developing a medium-
term fiscal framework with a clear fiscal anchor and
fiscal policy targets
Anchor fiscal policy for the medium
run in a credible and realistic
manner. Ensure fiscal sustainability
11. Complete an audit of public sector arrears,
with a view to clearing them
12. Present to congress a 2016 budget bill
consistent with the program targets for central
government and CPS deficits
13. Strengthen the Large Taxpayer Unit with
adequate staff levels
14. Present a plan for a gradual removal of foreign
exchange surrender requirements
15. Submit to Congress a law to reform the tax
code in line with recommendations of the FAD.
16. Establish a new tax administration agency
Improve the business environment
by increasing accountability of the
public sector
Ensure fiscal sustainability
Improve audit of large taxpayer
and ensure stable and fair revenue
collection by protecting the tax
base
Safeguard competitiveness and
strengthen the external position by
reducing foreign exchange
transaction costs on importers,
exporters, banks, and the BCH.
Simplify the tax code and align it
with international best practices
Introduce best practices in modern
tax administration and
Target
Date
Status
Continuous
Met
December
2014
December
2014
December
2014
Met
Met
Met
March 2015
Met
End-
November
2015 1
Not Met
March 2015
Met
End-
December
Met
2015
End-
December
20162
June 2015
Met
End-
December
20163
September
2015
September
2015
End-
December
2015
End-June
2016
Met
Met
Met
Not Met
End-June
Met
2016
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Table 2. Honduras: Structural Benchmarks (concluded)
17. Publish a national registry of trust funds,
conduct a study and prepare an assessment of their
feasibility.
18. Include in the annual budget submission a
document explaining the consistency of the
proposed budget with the achievement of the
medium term Fiscal Responsibility Legislation goals
19. Eliminate central government subsidies to
ENEE
Make fiscal policy more transparent
and improve its accountability.
Ensure consistency of the budget
with the FRL. Increase awareness of
the FRL.
Eliminate fiscal risk stemming from
subsidies. Align incentives of the
company away from government
support and towards higher
efficiency and autonomy.
End-June
Not Met
2016
End-
September
2016
Continuous
20. Adopt customs manuals in Puerto Cortes to
enhance collection of import duties in gasoline and
bulk freight
Enhance collection of import
duties.
End-June
2016
Met
______________________________________
1. The original date was March 2015.
2. The original date was June 2015.
3. The original date was June 2015.
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Table 3. Honduras: Proposed Structural Benchmarks
Proposed Measures
Rationale
Prior Action
Restore the PPP framework law to make it
consistent with international best practices.
Eliminate fiscal risks stemming from PPPs.
Improve transparency and accountability of
fiscal policy.
Structural benchmarks
Target
Date
Prior action
3rd review
Status
Met
1. BCH’s board to approve strategic plan
to modernize monetary policy. This must
include: the announcing of inflation-forecast
targeting as the nominal anchor; a
Improve operational framework for
communication strategy; and a road map
conducting monetary policy
End-
October2016
for the further development of the
interbank money and foreign exchange
markets.
2. BCH to prepare regulations to create a
system of primary dealers in the domestic
money market in line with international best
practices.
3. BCH to approve a plan to adopt
International Financial Reporting Standards
(IFRS) for the financial year ending
December 31, 2017.
4. BCH to issue supporting
regulations/rules for the development of the
FX market consistent with recommendation
of Fund TA report of November 2015.
5. BCH to reduce by 10 percent
obligations of authorized dealers (ADs) to
Develop the money market
Enhance financial supervision and financial
market infrastructure
End-
December
2016
End-
December
2016
Develop the foreign exchange interbank
End-
market
December
2016
End-
December
2016
sell their FX proceeds to the BCH, this is in
Develop the foreign exchange interbank
line with the recommendations of the
market
November 2015 MCM-TA report on
eliminating surrender requirements.
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Table 3. Honduras: Proposed Structural Benchmarks (concluded)
6. Submit to Congress reforms to the
BCH’s law in line with Fund
Give the Central Bank a clear mandate to
End March
recommendations to support the transition
maintain price stability
2017
towards inflation-forecast targeting.
7. National Banking Commission (CNBS) to
issue prudential regulations for the
To strengthen pension funds investment
End March
investments of public pensions funds in line
policies
2017
with IMF recommendations
8. Tax Administration Authority to be fully
Protect hard-won gains in tax collection and
End-March
operational.
ensure its stability
2017
9. Ensure that the trust funds are managed
within the general budget as per Art. 26 of
the FRL.
Increase transparency and predictability of
End-March
government spending
2017
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Attachment II. Technical Memorandum of Understanding
1.
This memorandum sets out technical understandings between the Honduran authorities and
the Fund staff for monitoring of the economic program agreed for the period November 2014–
November 2017. It defines the concepts used to assess observance of quantitative performance
criteria, structural benchmarks, and indicative targets specified in Tables 1 and 2 of the Memorandum
of Economic and Financial Policies (MEFP). It also specifies the frequency of the data to be provided
to the Fund to monitor the developments under the program. For the purposes of calculating
performances criteria for end-December 2015, all the assumptions indicated in the TMU signed on
April 29, 2015 will prevail.
Program Assumptions
2.
For program monitoring purposes, unless otherwise indicated, U.S. dollar denominated
components of the balance sheet of the Central Bank of Honduras will be valued at the exchange rate
of L. 21.1066/US$ exchange rate at end-August 2014. Amounts denominated in other currencies will
be converted for program purposes into U.S. dollar amounts using the cross-rates as of end-August
2014 published on the IMF website http://www.imf.org, including US$/EUR = 1.3188, JPY/US$ =
103.71, CHF/US$ = 0.9145, CAD/US$ = 1.0858, SDR/US$ = 0.6586.
Fiscal Targets
3.
Unless otherwise specified, the definitions of all fiscal variables contained in this Technical
Memorandum of Understanding are those defined in the IMF’s 2001 Manual on Government Finance
Statistics.
4.
The deficit of the combined public sector (CPS) will be measured from the financing side
(i.e., “below the line”), and will correspond to the net borrowing of the CPS, from both external and
domestic sources, excluding payment of domestic arrears accumulated until December 2013. The CPS
comprises the nonfinancial public sector (NFPS) and the operating result (quasi-fiscal balance) of the
central bank. The NFPS covers the central government, local governments and decentralized
agencies, the social security institute (IHSS), the public pension funds (INJUPEMP, INPREMA, and
IPM), all decentralized agencies and funds, and non-financial public enterprises. For the purposes of
measuring this PC, any capital grant resulting from debt cancellation as a result of the audit of
domestic arrears will not be included as revenue.
5.
The deficit of the central government will also be measured from the financing side,
excluding payment of domestic arrears accumulated until December 2013. For program purposes, the
central government corresponds to the concept of central administration used by the authorities and
includes the executive, judicial, and legislative branches. For the purposes of measuring this PC, any
capital grant resulting from debt cancellation as a result of the audit of domestic arrears will not be
included as revenue.
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6.
The current primary expenditure of the central government is defined as total current
expenditure less interest payments.
7.
The central government wage bill is defined as all central government wages and salaries,
including severance payments, plus employer social security, pension contributions, and other
contribution for social benefits; other remunerations (such as bonus payments and in-kind
compensations) should be included in the definition.
8.
Social spending is measured at the central government level and defined as the programs
and projects with social content that are financed with domestic resources, debt relief, grants, and
loans (see Table B).
9.
The overall balance of ENEE will be measured from the financing side. For program
purposes, it will be defined excluding subsidies from the central government. Subsides are defined as
in GFSM 2001 ¶6.60 “Subsidies also include transfers to public corporations and quasi-corporations to
compensate for losses they incur on their productive activities as a result of charging prices that are
lower than their average costs of production as a matter of deliberate government economic and
social policy.”
10.
The operating margin of ENEE is be defined as the ratio of operating revenue to operating
expenditure. Operating revenue will be defined as current revenue excluding interest earnings and
subsidies from the central government. Operating expenditure will be defined as total expenditure
excluding interest payments and capital spending.
11.
Net domestic financing of the CPS will be measured as the operating result of the central
bank and the annual change in the stocks of: (1) outstanding indebtedness of the NFPS (direct bank
credit plus bank holdings of public sector bonds less deposits) to the domestic financial system
(central bank, commercial banks, and other financial institutions); (2) outstanding public sector bonds
held outside the financial system; (3) repatriation of deposits held abroad; and (4) outstanding
suppliers’ credit and floating debt (un-cashed and undelivered checks, and unpaid invoices and
orders) of the central government, and unpaid orders of the rest of the NFPS. For the purposes of the
program, domestic financial system is defined as comprising all depositary institutions, according to
the Monetary and Financial Statistics Manual (MFSM) definition.
12.
Net lending (lending minus repayments). It is defined as the difference between loans
made by non-financial public institutions and repayments received by them.
13.
Discrepancies. The authorities will undertake periodic reconciliations to minimize discrepancies
between above-the-line and below-the-line financing data. As needed, such reconciliations must be
carried out prior to completion of the program reviews.
INTERNATIONAL MONETARY FUND 91
HONDURAS
Fiscal Adjustors
a.
For tax revenues: If tax revenues net of legally-mandated transfers to the Vida Mejor and
security trust funds were to exceed those underpinning the program targets, at least 50 percent of the
excess revenue will improve the balance of the government and the remainder could be allocated for
social and/or capital spending (Paragraph 8, Table B).
b.
For investment projects: If spending (in Lempiras) on the specific public investment projects
as specified in Table C is less than the amount specified in such table, the targets for the central
government and CPS will be reduced in the difference between the value in the Table and the
amount effectively spent (measured on an accrual basis).
Monetary Targets
14.
Net International Reserves (NIR) of the central bank (program definition). For program
purposes, the NIR of the central bank will be measured as gross international reserves that are readily
available minus (i) short-term reserve liabilities (including purchases and credits from the Fund), as
described in the international reserves table prepared by he central bank according to the MFSM;
(ii) foreign assets that are counterpart of foreign currency deposits of financial institutions at the
central bank and of any other liability of the central bank with residents that is payable in foreign
currency; (iii) the transfer to the central bank of foreign currency deposits held abroad by all public
entities, including HONDUTEL, INJUPEMP, and IHSS. Readily available reserves also exclude those
assets that are pledged or otherwise encumbered, including but not limited to reserve assets used as
collateral or guarantee for a third-party external liability. NIR will be valued at program accounting
exchange rates.
15.
Net domestic assets (NDA) of the central bank will be measured as the difference between
currency issue and NIR, both measured on the basis of end-of-period data.
Adjustors. Starting in 2016, the target floor on NIR will be adjusted downwards or upwards for
the shortfall or excess of programmed external public disbursements, except for those
disbursements related to debt issuances to restructure, refinance, or prepay existing debts.1
case of a shortfall or excess during the program period, the target floor on NIR will be adjusted
In
downwards or upwards by the full amount. External disbursements to the budget (including
sovereign bond placements) are expected to be US$117.10 million to end-June 2016 and total
US$416.60 million in 2016. For 2017, external disbursements to the budget (including sovereign
bond placements) are expected to be US$322.4 million to end-June 2017 and total US$624.6
million in the year.
1 In the program, any adjustment to the NIR target will be mirrored by an equal adjustment in the opposite direction
to the target ceiling on net domestic assets of the central bank.
92
INTERNATIONAL MONETARY FUND
External Targets
HONDURAS
16.
External debt. For program purposes, the definition of debt is the one set forth in point No.
8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board’s Decision
No. 6230-(79/140), as amended by Decision on December 5,
2014 (effective June 30, 2015). This
definition applies also to commitments contracted or guaranteed for which value has not been
received, and to private debt for which official guarantees have been extended and which, therefore,
constitute a contingent liability of the public sector. Excluded from this definition are normal import-
related credits, defined as liabilities that arise from the direct extension, during the normal course of
trading, of credit from a supplier to a purchaser—that is, when payment of goods and services is
made at a time that differs from the time when ownership of the underlying goods or services
changes. Normal import credit arrangements covered by this exclusion are self-liquidating; they
contain pre-specified limits on the amounts involved and the times at which payments must be made;
they do not involve the issuance of securities. For the purpose of the program, external debt is
defined on the basis of residency.
17.
Debt definition. The definition of debt set forth in No. 8 of the Guidelines on Public Debt
Conditionality in Fund Arrangements reads as follows:
(a)
For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e.,
not contingent, liability, created under a contractual arrangement through the provision of value in
the form of assets (including currency) or services, and which requires the obligor to make one or
more payments in the form of assets (including currency) or services, at some future point(s) in time;
these payments will discharge the principal and/or interest liabilities incurred under the contract.
Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of
money to the obligor by the lender made on the basis of an undertaking that the obligor will repay
the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits)
and temporary exchanges of assets that are equivalent to fully collateralized loans under which the
obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from
the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’
credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after
the date on which the goods are delivered or services are provided; and (iii) eases, i.e., arrangements
under which property is provided which the lessee has the right to use for one or more specified
period(s) of time that are usually shorter than the total expected service life of the property, while the
lessor retains the title to the property. For the purpose of these guidelines, the debt is the present
value (at the inception of the lease) of all lease payments expected to be made during the period of
the agreement excluding those payments that cover the operation, repair, or maintenance of the
property.
(b)
Under the definition of debt set out in this paragraph, arrears, penalties, and judicially
awarded damages arising from the failure to make payment under a contractual obligation that
constitutes debt are debt. Failure to make payment on an obligation that is not considered debt
under this definition (e.g., payment on delivery) will not give rise to debt.
INTERNATIONAL MONETARY FUND 93
HONDURAS
18.
Definition of public debt. For the purpose of the program, public sector debt is defined as
the debt of the NFPS.
19.
For purpose of the program, the guarantee of a debt arises from any explicit legal obligation
of the nonfinancial public sector or any other agency acting on behalf of the nonfinancial public sector
to service such a debt in the event of nonpayment by the recipient (involving payments in cash or in
kind), or from any implicit legal or contractual obligation to finance partially or in full any shortfall
incurred by the debtor.
20.
New external debt contracted.2
For the purposes of the program and starting end-June
2016 the continuous ceiling on the present value (PV) of new external debt contracted applies to all
external debt contracted in each year. PV will be calculated using a unified discount rate of 5 percent
and taking into account all different loans agreements, including maturities, grace periods, payment
schedules, upfront commissions, and management fees. The PV of debt at the time of its contracting
is calculated by discounting the future stream of payments of debt service due on this debt. The PV
of every loan with negative grant element will be equal to its face value. The continuous ceiling
applies not only to debt as defined above, but also to commitments contracted or guaranteed for
which value has not been received.
21.
New external debt contracted adjustor. Recognizing that deviations may come from one
large loan or a few number of small/medium loans, program conditionality could accommodate
moderate changes to the debt limit set on PV terms and use an adjustor of up to 5 percent of the
new borrowing in PV terms (i.e., the envisioned debt limit) only when deviations are prompted by an
unexpected change in the financing terms of a loan or loans.
22.
Exclusions. Excluded from the external debt continuous ceiling are: (i) debts classified as
international reserve liabilities of the Central Bank, (ii) debts to restructure, refinance, or prepay
existing debts, (iii) use of Fund resources (iv) short-term import financing (with a maturity of less than
one year), and (v) central bank instruments placed in the domestic market held by nonresidents.
23.
Stock of external debt arrears. For the purpose of the program’s continuous ceiling,
external debt service arrears are defined as overdue debt service arising in respect of obligations
incurred directly or guaranteed by the public sector, except on debt subject to rescheduling or
restructuring, as indicated by the respective creditors. The NFPS will accumulate no external debt
arrears during the program period.
2 The Public Debt Limits in IMF-Supported Programs website at
http://www.imf.org/external/np/spr/2015/conc/index.htm provides information on this issue and The Present Value
(PV) Monitoring Tool for calculations.
94
INTERNATIONAL MONETARY FUND
Energy Sector
HONDURAS
24.
Arrears of ENEE are defined as overdue payments of ENEE to private and public entities.
During the program period, the stock of arrears to the private sector will not be increased relative to
3,867 million of Lempiras (as at December 2013), excluding technical delays stemming from the
payment process. Technical delays are defined as the maximum period allowed for the payment of
suppliers’ and/or contractors’ invoices to ENEE without incurring arrears, in line with the law on public
contracts (Decree 74-2001). This decree states a deadline up to 45 days starting from the submission
of appropriate documents for payment. This does not preclude payments before the deadline if it is
agreed by both parties.
Monitoring and Reporting Requirements
25.
The information required to monitor the compliance with quantitative and structural
benchmarks specified in the MEFP will be supplied to the Fund at least monthly (electronically, to the
extent possible) and within 45 days of the end of the previous month (unless otherwise noted)
according to the sources detailed in the next paragraph.
26.
The ceilings on the deficit of the central government and of the CPS will be monitored
below-the-line on the basis of the monthly reports Financiamiento de la Administración Central and
Financiamiento del Sector Público Combinado, respectively, prepared by the central bank, which
contain:
27.
Net external financing of the central government and the NFPS, respectively, with detailed
information on disbursements, amortizations, exceptional financing, zero coupon bonds, and
accumulation of arrears. This information will be prepared by the central bank and reconciled with the
Ministry of Finance.
28.
Net domestic financing of the central government and the NFPS, respectively, with
detailed information on: (1) net domestic financing from the central bank and the rest of the
financial system to the central government and the NFPS, as contained in the Balance diario; (2) net
placement of bonds (including stabilization bonds) by the central government and the NFPS outside
the financial system, as reported by the central bank with data from the Public Credit Directorate of
the Ministry of Finance; (3) change in foreign currency deposits held abroad by the central
government and the NFPS; and (4) change in the outstanding stock of suppliers’ credit and floating
debt of the central government, as reported by the Treasury, and the rest of the NFPS as reported by
the central bank. To monitor the net domestic financing to the CPS, the central bank will provide the
Fund with detailed data on a cash basis on the operating revenue and expenditure of the central
bank.
29.
The ceilings on the wage bill of the central government will be monitored monthly on the
basis of the Ministry of Finance report: Sueldos y salarios de la administracion central.
INTERNATIONAL MONETARY FUND 95
HONDURAS
30.
To complement the monitoring of fiscal performance, a breakdown of tax revenue by type of
tax will also be provided monthly.
31.
Social spending (Table B) will be monitored quarterly on the basis of financial reports
provided by the Ministry of Finance.
32.
The overall balance of ENEE and its non-accumulation of arrears will be monitored monthly
on the basis of financial reports provided by the Ministry of Finance.
33.
The floor on NIR and the ceiling on NDA of the central bank will be monitored on the
basis of information produced by the central bank, in accordance with the new presentation of the
MFSM. This information will be provided within two weeks of the end of the previous month.
34.
The ceilings on the contracting of non-concessional external debt and on the non-
accumulation of external payments arrears will be monitored with information provided by the
Ministry of Finance. The accounting of non-reschedulable external debt-service arrears by creditor (if
any), with detailed explanations, will be transmitted by the Ministry of Finance on a monthly basis
within four weeks of the end of each month. Moreover, a loan-by loan accounting of all new loans
contracted or guaranteed by the public sector, including detailed information on the amounts,
currencies, and terms and conditions, as well as relevant supporting materials, will be transmitted by
the central bank on a quarterly basis within four weeks of the end of each quarter.
35.
Implementation of structural measures in the program will be monitored monthly based
on information provided by the central bank, the Ministry of Finance, and the Banking and Securities
Commission.
96
INTERNATIONAL MONETARY FUND
Item
I. Fiscal Data
Table 1. Data to Be Reported to the IMF
Periodicity
HONDURAS
Net external financing: detailed information
on disbursements, amortizations, exceptional
financing, zero coupon bond, and
accumulation of arrears.
Net domestic financing of the central
government and the NFPS: detailed information
on (1) net domestic financing from the central
bank and the rest of the financial system to the
central government and the NFPS, (2) net
placement of bonds by the central government
and the NFPS outside the financial system,
(3) change in foreign currency deposits held
abroad by the central government and the
NFPS; and (4) change in the outstanding stock
of suppliers’ credit and floating debt of the
central government, as reported by the
Treasury, and the rest of the NFPS as reported
by the central bank.
Monitoring of net domestic financing to
the central government will require that the
central bank provide the Fund with detailed
data on a cash basis on the operating revenue
and expenditure of the central bank.
Monitoring of net domestic financing to the
CPS will require that the central bank provide
the Fund with detailed data on a cash basis on
the operating revenue and expenditure of the
central bank.
Monthly, within 45 days of the end of each
month.
Monthly, within 45 days of the end of each
month.
Monthly, within 45 days of the end of each
month.
Monthly, within 45 days of the end of each
month.
Overall balance of ENEE and arrears (if any,
with detailed explanations)
Monthly, within 45 days of the end of each
month.
Wage bill of the central government.
Breakdown of tax revenue by type of tax
Monthly, within 45 days of the end of each
month.
Monthly, within 45 days of the end of each
month.
Report on tax credits (claims submitted, claims
paid, claims in dispute)
Monthly, within 45 days of the end of each
month.
INTERNATIONAL MONETARY FUND 97
HONDURAS
Table 1. Data to Be Reported to the IMF (concluded)
Social spending
Detailed information on:
Quarterly, within 45 days of the end of each
quarter.
Revenues and expenditures of the
central government.
Revenues and expenditures of the
NFPS, including the operating balance
of public enterprises.
Revenues and expenditures of ENEE.
Annual estimation of tax expenditures
II. Monetary Data
Detailed information on the Central Bank
balance sheet, including Net International
Reserves and Net Domestic Assets.
Monthly, within 45 days of the end of
each month.
Quarterly, within 45 days of the end of
each month.
Monthly, within 45 days of the end of
each month.
Annually as part of the budget bundle
Monthly, within 2 weeks of the end of
each month.
Detailed information on domestic liabilities of
the central bank payable in foreign currency,
including change in foreign currency deposits
of public enterprises in the central bank.
Monthly, within 2 weeks of the end of
each month.
III. External Debt
Loan-by loan accounting of all new loans
contracted or guaranteed by the public
sector, including detailed information on the
amounts, currencies, and terms and
conditions, as well as relevant supporting
materials
The accounting of arrears on external
debt- service by creditor (if any), with
detailed explanations.
IV. Additional Data
Balance of Payments statistics
Quarterly, within four weeks of the end of
each quarter.
Monthly, within four weeks of the end of
each month.
Quarterly, within three months of the end of
each quarter.
98
INTERNATIONAL MONETARY FUND
HONDURAS
Table 2. Social Programs
Description
Bono Diez Mil and Vida Mejor Programs
Bono Diez Mil
Vida Mejor
Other social investment expenditures and programs
Honduran Social Investment Fund (FHIS)
Community Education Program (PROHECO)
Family allowances program (PRAF)
Healthy schools program (Free school meals)
Free tuition
Social work scholarships
Transportation education bond
Social aid to persons
Patronatos Aldeas y Caserios, NGOs
Academic excellence scholarships
Various scholarships
Other scholarships and programs
Table 3. Extended Investment Plan for 2016
In millions of Lempiras
Project
CA-5 section 2A
Amount
404
Road infrastructure priority projects
Logistic corridor, sections I-A and I-B
CA-4 La Entrada-Santa Rosa de Copan
CA-4 La Entrada-El Florido
Irrigation project: Nacaome valley
CA-1: Jicaro Galan - El Amatillo
CA-1: Jicaro Galan - Choluteca
CA-3: jicaro Galan - Guasaule
Total
229
229
142
142
115
115
115
115
1,605
INTERNATIONAL MONETARY FUND 99
HONDURAS
October 13, 2016
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
AND THIRD AND FOURTH REVIEWS UNDER THE STAND-BY
ARRANGEMENT AND THE ARRANGEMENT UNDER THE
STANDBY CREDIT FACILITY—INFORMATIONAL ANNEX
Prepared By
The Western Hemisphere Department
CONTENTS
FUND RELATIONS _________________________________________________________________________ 2
RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ______________________ 7
RELATIONS WITH THE WORLD BANK GROUP ___________________________________________ 9
STATISTICAL ISSUES ____________________________________________________________________ 15
HONDURAS
FUND RELATIONS
(As of May 31, 2016)
Membership Status: Joined: December 27, 1945
General Resources Account:
Quota
Fund holdings of currency (Exchange Rate)
Reserve Tranche Position
SDR Department:
Net cumulative allocation
Holdings
Outstanding Purchases and Loans:
ECF Arrangements
Latest Financial Arrangements:
SDR Million
249.8
211.1
38.7
% Quota
100.00
84.51
15.49
SDR Million
123.85
53.84
% Allocation
100.00
43.48
SDR Million
1.02
% Quota
0.79
Date of
Expiration
Amount
Approved
Amount Drawn
Type
Arrangement
Date
(SDR Million)
(SDR Million)
Stand-By
SCF
Stand-By
SCF
Stand-By
ECF1
ECF1
12/03/2014
12/03/2014
10/01/2010
10/01/2010
04/07/2008
02/27/2004
03/26/1999
12/02/2017
12/02/2016
3/31/2012
3/31/2012
03/30/2009
02/26/2007
12/31/2002
77.70
51.80
64.75
64.75
38.85
71.20
156.75
0.00
0.00
0.00
40.68
108.30
Projected Payments to Fund
(SDR Million; based on existing use of resources and present holdings of SDRs):
2016
0.0
0.02
0.02
Forthcoming
2018
0.0
0.04
0.04
2017
0.0
0.04
0.04
2019
0.0
0.04
0.04
2020
0.0
0.04
0.04
Principal
Charges/Interest
Total
1 Formerly PRGF.
2 INTERNATIONAL MONETARY FUND
Implementation of Enhanced HIPC Initiative: Enhanced Framework
HONDURAS
Commitment of HIPC Assistance
Decision point date
Assistance committed (NPV terms)
Total assistance (US$ million)
Of which: IMF assistance (US$ million)
Completion point date
Disbursement of IMF Assistance (SDR million)
Amount disbursed
Interim assistance
Completion point balance
Additional disbursement of interest income
Total Disbursements
Implementation of MDRI Assistance
Total Debt Relieve (SDR million)3
Of which: MDRI
HIPC
Debt Relief by Facility (SDR million)
June 30, 20002
End-1999
556.00
30.30
April 2005
22.66
8.80
13.86
3.70
26.36
107.46
98.24
9.21
Delivery Date
January 2006
GRA
N/A
Eligible Debt
PRGF
107.46
Total
107.46
Implementation of Catastrophe Containment and Relief (CCR): Not Applicable.
Exchange Rate Arrangement. Honduras’ de jure exchange rate arrangement is crawling band since
July 2011, when the Central Bank of Honduras (BCH) reactivated the crawling band arrangement
that had been in operation until mid-2005. The de facto exchange arrangement is a crawling peg.
The exchange rate of the lempira is determined by foreign exchange auctions of the BCH. The BCH
maintains an operational band requiring all bid prices for the purchase of foreign exchange to be
within a range of 7 percent above or below the base price, with such prices subject to the
requirement that bids in auctions not exceed 1 percent of the average base price from auctions
during the preceding seven business days. The base price is revised weekly according to a procedure
2 World Bank Board, July 6, 2000.
3 The Multilateral Debt Relief Initiative (MDRI) provides 100 percent debt relief to eligible member countries that are
qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the
full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for
such debt relief.
INTERNATIONAL MONETARY FUND
3
HONDURAS
established by the BCH board of directors for this purpose, which includes the following variables:
(1) the differential between the domestic inflation rate and the estimated inflation rates of
Honduras’s main trading partners, (2) changes in the exchange rates of these countries’ currencies
vis-à-vis the U.S. dollar, and (3) the performance of official reserve assets. In this setting, the lempira
has followed a slow depreciating trend against the U.S. dollar.
The BCH calculates an official exchange rate (TCR) daily as the weighted average of the accepted
bids submitted by participants in BCH’s foreign exchange auction. The TCR is then used the next day
for (i) sales of foreign exchange by authorized dealers to the BCH, (ii) purchases of foreign exchange
by authorized dealers from their clients and (iii) sales and purchases of foreign exchange between
public institutions and the BCH.
Honduras has accepted the obligations under Article VIII, Section 2, 3, and 4 of the Articles of
Agreement, and currently maintains two multiple currency practices subject to the Fund’s approval
under Article VIII, Section 3. The two multiple currency practices arise from the absence of a
mechanism to prevent the potential deviation of more than two percent at any given time among
effective exchange rates for spot exchange transactions: (i) between successful bids within the
foreign exchange auction; and (ii) between the official exchange rate (TCR) of the day and the
exchange rates at which foreign exchange is sold at the auction on that day.
Article IV Consultation. The last Article IV consultation with Honduras was concluded on
June 9, 2014.
An update safeguards assessment of the BCH was concluded in April 2015. The assessment
concluded that the BCH Law continues to pose a significant risk to central bank autonomy and also
that the bank’s Board and audit committee do not have any independent members, which
undermines these bodies’ oversight function. The assessment recommended amendments to the
BCH Law to protect the bank from political interference, establish its financial autonomy, and
strengthen its governance arrangements. In addition, the assessment noted that recurring operating
losses since the 1990s have severely weakened the bank’s financial position and a recapitalization
plan has been initiated, with the BCH expected to achieve positive equity in 2021. The assessment
also recommended that the BCH adopt International Financial Reporting Standards.
FSAP participation and ROSCs. Fiscal ROSC conducted on February 26–March 2, 2001
(IMF Country Report No. 02/16) and updated (IMF Country Report No. 05/256). Data ROSC data
conducted on July 8–24, 2003 (IMF Country Report No. 05/230). FSAP conducted on
October 14–19, 2002 and January 20–February 4, 2003. FSAP Update conducted on September 24 to
October 9, 2007.
Technical Assistance. Honduras has received substantial technical assistance. The table below
details assistance provided since November 2012.
4 INTERNATIONAL MONETARY FUND
Department
LEG
Purpose
Legal Framework for Bank Resolution
Time of Delivery
May 2016
HONDURAS
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
MCM
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
Central Bank Accounting
Bank Supervision & Regulations
Bank Supervision and Regulations
Monetary and Foreign Exchange Policy
Bank Supervision and Regulation
Bank Supervision and Regulation
CAPTAC-DR: Building of a Model of Inflation Forecasts
Bank Supervision and Regulations
CAPTAC-DR: Hedging Derivatives
CAPTAC-DR: Building a Model for Structural Liquidity
Forecasts
CAPTAC-DR: Treasury Management
CAPTAC-DR: Bank Supervision and Regulation
CAPTAC-DR: Treasury Management
Monetary Operations
Bank Supervision and Regulations
CAPTAC-DR: Risk Based Supervision Scheme
FX Lending Prudential Requirements
CAPTAC-DR: Strengthening Monetary Policy Framework
Financial Supervision
Strengthening Monetary Policy Operational Framework May 2015
May 2015
CAPTAC-DR: Risk Based Supervision Implementation
August 2015
CAPTAC-DR: Strengthening and Expanding the
Macroeconomic Model
Modernizing The Foreign Exchange System
CAPTAC: Training on Macroeconomic Forecast Models
CAPTAC: Forecast Efficiency of the Central Bank´s Semi-
structural Macroeconomic Model
Jul 2014
Jul 2014
Oct 2014
Nov 2014
Dec 2014
Dec 2014
Feb 2015
Feb 2015
March 2015
Nov 2012
Nov 2012
Feb 2013
Apr 2013
Apr 2013
May 2013
Nov 2013
Nov 2013
Dec 2013
May 2014
Sep 2015
February 2016
March 2016
Public Financial Management
MTEF Implementation
Budget Execution and Cash Planning
Customs Administration
Tax Administration
Customs Administration
Public Financial Management
Tax Administration
Budget Execution and Arrears Control
Managing Fiscal Risks
Customs Administration
Nov 2012
Nov 2012
Jan 2013
Jan 2013
Mar 2013
Apr 2013
Aug 2013
Aug 2013
Sept 2013
Sep 2013
Nov 2013
INTERNATIONAL MONETARY FUND
5
HONDURAS
Department
FAD
FAD
FAD
FAD
Time of Delivery
Purpose
Dec 2013
Tax Administration
Feb 2014
Financial Programming and Analyzing Fiscal Risks
Feb 2014
Public Financial Management
Strengthening the Medium-term Expenditure Framework Feb 2014
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
FAD
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
Customs Administration
Tax Administration
Modernization of Revenue Administration
Tax Administration
Management of fiscal risks
Treasury Single Account
Accounting Rule for PPP Operations
Medium-term expenditure framework
Medium-term expenditure framework
Streamlining tax exemptions
Tax administration
Apr 2014
Apr 2014
Jul 2014
Oct 2014
Oct 2014
Oct 2014
Dec 2014
Mar 2015
July 2015
March 2016
May 2016
Nov 2012
Feb 2013
Feb 2013
Mar 2013
May 2013
Jul 2013
Nov 2013
Dec 2013
Mar 2014
Balance of Payments
CAPTAC: Export/Import Price Index and PPI
Migration to GFSM 2001
CAPTAC: National Accounts 2008 SNA
CAPTAC: Balance of Payments Statistics and IIP
CAPTAC: National Accounts-Construction Data Sources
CAPTAC: Balance of Payments
CAPTAC: Producer Price Index
CAPTAC: National Accounts-Statistics and Construction
Data Sources
CAPTAC: Coordinated FDI and Portfolio Surveys
External Debt Statistics
Balance of Payments and IIP Statistics
Topics of the Secondary Income Account
Balance of Payments and IIP
Topics of the Financial Account
CAPTAC: National Accounts-Statistics and Construction
Data Sources
Balance of Payments and IIP
Balance of Payments and IIP
Enhanced General Data Dissemination System (e-GDDS) March 2016
National Accounts Statistics Mission
Mar 2014
Jun 2014
Jul 2014
Jul 2014
Feb 2015
March 2015
May 2015
July 2015
June-July 2016
April 2016
6 INTERNATIONAL MONETARY FUND
HONDURAS
RELATIONS WITH THE INTER-AMERICAN
DEVELOPMENT BANK
(As of June 13, 2016)
RECENT PROJECTS AND OBJECTIVES
1.
On December 2014, the IADB approved its country strategy with Honduras for the
period 2015-2018. It focused on the following areas: (i) fiscal consolidation; (ii) sustainability and
competitiveness in the energy sector; (iii) road infrastructure for regional integration; (iv) social
inclusion; and (v) sustainable development in the Central District.
2.
As of June 16th 2016, the portfolio of approved sovereign-guaranteed loans under
execution amounted to USD 689.4 million, with an undisbursed balance of USD 382.5 million.
3. The existing sovereign guaranteed portfolio focuses on: (i) transport 44 percent; (ii) social
protection 23%; (iii) energy 9 percent; (iv) modernization of the State 8 percent; and (v) health 7
percent. In the private sector, the IADB has four non-sovereign projects under execution amounted
to USD 44 million, which support trade facilitation and energy efficiency.
4.
The pipeline for IADB approvals in 2016 includes four operations in the public sector
for USD 170 million distributed as follow: (i) one operation in the transport sector for USD 75
million for the improvement of road infrastructure (ii) two operations in the social protection sector,
aimed at: (a) improving women living conditions, and (b) breaking the intergenerational poverty
transmission cycle; and (iii) one operation in climate change for USD 25 million. The pipeline will be
approved before the end of the year.
IADB Sovereign Guaranteed Loan Portfolio in Honduras
As of June 13th 2016 (In millions of US Dollars)
Sector
Current Approved
Available Amount
Transport
Social protection
Modernization of the State
Health
Energy
Municipal management
Fiscal
Disaster risk prevention
Trade
Total
267.0
109.9
102.0
80.0
45.9
28.6
27.0
19.0
10.0
689.4
169.4
89.9
30.9
27.2
34.2
1.5
27.0
1.7
0.7
382.5
INTERNATIONAL MONETARY FUND
7
HONDURAS
IADB Non-sovereign Guaranteed Loan Portfolio in Honduras
As of June 13th 2016 (In millions of US Dollars)
Sector
Current Approved
Available Amount
Trade facilitation
Energy efficiency
Total
35.0
8.9
43.9
20.0
8.9
28.9
IADB Disbursement of Sovereign Guaranteed Loan Portfolio in Honduras
2010-2016 (In millions of US Dollars)
Year
2010
2011
2012
2013
2014
2015
2016*
(*) projected
Amount
162.8
256.1
206.8
224.3
302.0
216.3
114.0
IADB Annual Net Flows with Sovereign Guarantee in Honduras 2010-2015
(In millions of US Dollars)
Repayments
Disbursement
Net Loan Flow
2010
2011
2012
2013
2014
2015
25.3
24.3
17.1
12.0
12.7
19.5
162.8
256.1
206.8
224.3
302.0
216.3
137.5
231.7
189.7
212.2
289.3
196.8
Subscriptions and Contributions
1.3
0.0
15.9
8.7
9.3
1.7
Net Capital Flow
136.2
231.7
173.8
203.6
280.1
195.1
Interest and Charges
10.2
12.7
16.5
22.1
26.1
32.7
Net Cash Flow
125.9
219.1
157.2
181.5
254.0
162.4
8 INTERNATIONAL MONETARY FUND
HONDURAS
RELATIONS WITH THE WORLD BANK GROUP
(As of June 15, 2016)
A new Country Partnership Framework (CPF) for 2016-2020 was endorsed by the Board on
December 2015 using inputs from the Systematic Country Diagnostic (which was prepared in
October 2015). The 2016-2020 CPF seeks to support Honduras in its efforts to foster social
inclusion, while bolstering conditions for growth and reducing vulnerabilities to enhance the
country’s resilience. The new CPF will continue supporting the Honduras’ Country Vision for 2038
(adopted in 2010) and the Administration’s “Plan para una Vida Mejor.” Strengthening
institutions and enhancing governance are critical cross-cutting themes that will underpin the
strategic pillars.
The combined World Bank Group active portfolio in Honduras (IDA, IFC, MIGA plus trust funds),
equals US$ 1.35 billion. The IDA17 allocation is SDR97.8 million (US$138 million), of which US$
130 million has already been allocated to an additional financing for a Social Protection Program
and two Development Policy Credits. At the request of the Government of Honduras, the WBG
mobilized resources from the IDA 17 round to help the new administration with its fiscal
consolidation program, including a US$55 million Fiscal Sustainability and Enhanced Social
Protection Development Policy Credit approved in December 2014 and a US$50 million First
Fiscal Sustainability and Enhanced Competitiveness DPF approved in December 2015.
The active portfolio is made up of 9 projects, totaling US$354.28, of which approximately US$95
million are undisbursed. The portfolio is rather mature, and by end of FY2016 the Bank expects to
have 7 operations disbursing. The portfolio was consolidated from 14 to 9 projects with
increasingly larger grant or credit amounts. Project disbursements (excluding budget support)
increased steadily from US$62.6 million in FY12, to US$87.1 million in FY13. Gains in
disbursements during the first two years of the previous Country Partnership Strategy period
were reversed by the Government’s fiscal measures to contain the deficit. As a result, project
disbursements dropped to US$68.1 million in FY14, US$36.2 million in FY15 and US$ 28.9 in FY16.
The World Bank’s current activities are helping Honduras efforts to achieve fiscal consolidation,
improve the investment climate (especially transport/logistics for trade), strengthened education
quality and social protection and better disaster risk management. With respect to reducing the
fiscal burden of the state-owned Electricity Company (ENEE), progress has been made in laying
the policy and institutional groundwork for future improvements and the authorities have taken
measures to reduce subsidies and adjust electricity tariffs, although ENEE’s loses continue to
represent a fiscal burden. Furthermore, the World Bank’s activities are contributing to Honduras
adopt a balanced and comprehensive approach to reducing violence, combining the traditional
focus on control and punishment with a new emphasis on prevention contributing to the
achievement of improvements in citizen security and to strengthening evidence-based decision-
making at both national and local levels. Targets aimed at improving coverage and management
INTERNATIONAL MONETARY FUND
9
HONDURAS
of Honduras´ National Conditional Cash Transfer Social Protection Program (Bono Vida Mejor,
formerly Bono 10,000) have been achieved. Ongoing activities are also supporting public sector
financial management practices, increased access of small and medium enterprises to agriculture
markets, land titling, and improved logistics in transport.
In line with its regional strategy, IFC’s investment activities focus on renewable energy
generation, strengthening and broadening the financial sector, and supporting competitive
agribusiness and commercial sectors. Furthermore, IFC has played a catalytic role in PPP
development, improving access to finance for SMEs, streamlining administrative processes for
business regulation and regional trade, and facilitation of international trade. IFC investments,
for instance, include four large scale renewable energy projects with an aggregate capacity of
210.5MW (accounting for about 15 percent of the country’s installed capacity), financing to 7 out
of the 16 banks of the local banking system and investments on commercial real estate, services
and agribusiness sectors. Current portfolio stands at US$662.56 million, mostly in financial sector,
infrastructure, commercial real estate and agribusiness.). This represents a substantial increase
compared to FY11 results of US$193.4 million and is IFC’s second largest portfolio in Central
America. Since 2012 IFC financing has contributed to improving access to finance for
approximately 18,000 micro, small and medium enterprises (MSMEs) and is supporting key agri-
commodities, such as palm oil and sugar reaching 2,500 farmers and contributing to nearly 7,500
direct jobs, out of which 1,600 (21 percent) are women. IFC is currently considering opportunities
in commercial property development, construction materials, infrastructure, logistics and health
coverage.
MIGA has US$326.9 million in gross exposure through three projects in the transport and energy
sectors. MIGA has provided guarantees of US$187.9 million for the construction and operation of
a toll road which will improve the connectivity between Honduras’ second largest city and the
coast. In energy, MIGA granted US$82.4 million in guarantees for a 24MW expansion of the
existing 102MW Cerro de Hula wind farm, and an investment of US$56.7 million in guarantees in
three photovoltaic projects supporting 80 MW solar power.
A. Projects
The active IDA portfolio is made of 9 projects (8 investment operations plus one US$50
million budget support operation) totaling US$354 million in IDA funding, of which
approximately US$95 million is undisbursed.
Honduras Rural Competitive Project. The Project Development Objective (PDO) is to contribute to
increased productivity and competitiveness among organized rural small-scale producers through
their participation in productive alliances. The closing date of this Project is November 30, 2015,
however it is expected to be extended with an additional financing.
Corredor Seco Food Security Project. The objective of the Project is to enhance food and
nutritional security of vulnerable households in Selected Areas of the Corredor Seco. Project will
10 INTERNATIONAL MONETARY FUND
HONDURAS
increase household availability of quality food and revenues of poor and extremely poor rural
residents in 25 municipalities as a basis for improving nutrition and in the long-term for reducing
child stunting. Project will also improve nutrition and nutritional practices especially for children and
women in selected municipalities. Project is implemented with US$ 30 million of GAFSP (trust fund)
resources.
Honduras Water and Sanitation Sector Modernization Project. The PDO is to support the
Recipient to improve: (a) the sustainability, efficiency, and reliability of Honduras’s water supply and
sanitation (WSS) services in Eligible Municipalities; (b) the performance of its national WSS sector
institutions in the exercise of their respective roles in accordance with the WSS Sector Framework
Law; and (c) its capacity to respond promptly and effectively to an Eligible Emergency. The closing
date of this Project is December 31, 2016.
Second Land Administration Project. The PDO is to provide the population in the Project Area
with improved, decentralized land administration services, including better access to and more
accurate information on property records and transactions. The closing date of this Project is
January 30, 2017.
Social Protection. The PDOs of this Project are to: (a) improve the institutional capacity of
Recipient’s institutions to manage the Conditional Cash Transfer (CCT) Program, by strengthening
transparent mechanisms and instruments for targeting Program beneficiaries, monitoring
compliance with Program co-responsibilities, and making payments to Program beneficiaries; (b)
provide income support to Eligible Beneficiaries; (c) increase the use of preventive health services
and school attendance in grades 1 to 6 among Program beneficiaries in rural areas; and (d) improve
the Recipient’s capacity to respond promptly and effectively to an Eligible Emergency. The closing
date of this Project is December 31, 2017.
Safer Municipalities. The PDOs of this Project are to support Honduras (i) to improve the capacities
of national and local actors in violence prevention, (ii) to ensure urban municipalities are addressing
crime and violence risk factors, and (iii) to respond promptly and effectively to an eligible
emergency. The closing date of this Project is August 31, 2018.
Disaster Risk Management. The PDOs of this Project are to support Honduras to: (a) continue
strengthening its capacity for integrated disaster risk management at the municipal and national
level; and (b) improve its capacity to respond promptly and effectively to an eligible emergency. The
closing date of this Project is April 30, 2019.
Rural Infrastructure. The PDOs of the Project are: (a) to improve the access, quality and
sustainability of infrastructure services (roads, water, sanitation and electricity) for the rural poor in
the Recipient's territory; (b) to develop capacities and an enabling environment within the Recipient
for locally-driven infrastructure service provision and planning; and (c) to improve the Recipient's
capacity to respond promptly and effectively to an Eligible Emergency. The closing date of this
Project is June 30, 2016.
INTERNATIONAL MONETARY FUND
11
HONDURAS
First Fiscal Sustainability and Enhanced Competitiveness DPF to support the Government’s
efforts in (i) strengthening institutional arrangements to support fiscal sustainability; and (ii)
enhancing the regulatory framework to promote competitiveness.
Recently Closed Projects:
Improving Public Sector Performance (closed December 2015). The PDO is to strengthen the
management of public finances and to establish a more efficient, effective and transparent public
procurement system through: (i) upgrading the public financial management system; (ii) upgrading
the e-procurement platform; (iii) enhancing the internal control systems over personnel
expenditures; and (iv) building capacity of the Central Administration.
Power Sector Efficiency Enhancement Project. The PDO was to improve ENEE's operational and
financial performance, thus contributing to the sustainability of the power sector in Honduras.
Roads Rehabilitation and Improvement. The PDO was to improve the quality of road network
and of road management in support of the government's growth and competitiveness goals
through: (i) Improved governance and enhanced road management capacity in INSEP (former
SOPTRAVI) and the Road Fund; (ii) Improvement in selected road corridors; and (iii) Extension in the
scope of the maintenance of the unpaved road network; and (iv) improvement of the Recipient
capacity to respond promptly and effectively to an eligible emergency
B. Non-Lending Activities
Economic and Sector Work. Honduras benefits from a comprehensive series of completed,
ongoing and planned analytical and advisory activities to support the CPF pillars. Recently
completed economic and sector work includes: a “Honduras Public Expenditure Review: Towards
Restoring Fiscal Consolidation” (2013); a poverty and inequality report titled “Centroamérica en el
Nuevo Milenio: Seis Historias Diferentes de Pobreza y Desigualdad” (2013) with a chapter on
Honduras; a series of Policy and Sectoral Notes titled “Towards Fiscal Stability and Sustainable
Development for a Better Life” (2014); a “Honduras Gender Assessment” (2014); a “Debt
Management and Performance Assessment” (2014); a “Honduras Current Account Assessment”
(2014); a “Honduras Economic Diagnostic for National Action (DNA)” (2015); and a Guidance for
enhanced regulatory capacity for improved governance in extractive industries (2016).
12 INTERNATIONAL MONETARY FUND
HONDURAS
C. Financial Relations
Project
Loan
Original
Amount
(USD Eq)
Percent
Disbursed
Approval
Sign
Closing Undisbursed
Disbursed
Date
Date
Date
Balance
Outstanding
(USD Eq)
Balance
(USD Eq)
Honduras First Fiscal
Sustainability and Enhanced
Competitiveness DPF
Disaster Risk Management
Project
HN Safer Municipalities
Improving Public Sector
Performance
Second Land Administration
Project
Social Protection
Social Protection
Social Protection
Honduras Rural
Competitiveness Project
IDA
57500
IDA
51900
IDA
51920
IDA
50200
IDA
46410
IDA
56030
IDA
52940
IDA
47740
IDA
44650
HN Water and Sanitation Sector
IDA
Modernization Project
52700
Modernization Project
43350
HN Rural Infrastructure Project
HN Rural Infrastructure Project
IDA
52890
IDA
40990
HN Water and Sanitation Sector
IDA
30,000,000.00
100.00%
21-Jun-07
50,000,000.00
100.00%
15-Dec-15
15-
30-Mar-
0.00
50,000,000.00
Dec-15
17
30,000,000.00
34.46%
13-Dec-12
18-
30-Apr-
15,611,633.27
8,208,877.16
Dec-12
19
15,000,000.00
32.20%
13-Dec-12
18-
31-Aug-
9,355,104.77
4,443,393.23
Dec-12
18
18,200,000.00
91.17%
6-Dec-11
7-Dec-
31-Dec-
470,884.77
4,860,453.65
32,800,000.00
98.05%
30-Jun-11
25,000,000.00
4.00%
31-Mar-15
12,300,000.00
58.76%
8-Aug-13
11
23-
Aug-
11
19-
May-
15
26-
Aug-
13
15
30-Jan-
17
562,181.29
28,302,023.71
31-Dec-
24,000,000.00
1,000,000.00
17
31-Dec-
4,760,869.60
6,784,812.40
17
40,000,000.00
98.66%
29-Jun-10
2-Aug-
31-Dec-
498,508.86
36,813,756.14
30,000,000.00
85.44%
17-Jun-08
10
17-
17
31-Dec-
2,870,494.19
16,841,645.81
Sep-08
16
10,000,000.00
49.24%
19-Jun-13
12-Jul-
31-Dec-
4,788,949.24
4,644,717.76
13
16
16-
Nov-
07
31-Dec-
16
0.00
27,878,598.00
20,000,000.00
99.83%
19-Jun-13
12-Jul-
30-Jun-
20,358.78
11,890,393.46
47,000,000.00
100.00%
7-Jul-05
13
16-
Nov-
05
16
30-Jun-
16
0.00
40,550,688.00
INTERNATIONAL MONETARY FUND
13
HONDURAS
Period
Disb. Amt.
Repay Amt.
Net Amt.
Charges
Fees
Jul 2006 - Jun
2007
Jul 2007 - Jun
2008
Jul 2008 - Jun
2009
Jul 2009 - Jun
2010
Jul 2010 - Jun
2011
Jul 2011 - Jun
2012
Jul 2012 - Jun
2013
Jul 2013 - Jun
2014
Jul 2014 - Jun
2015
Jul 2015 - Jun
2016
41,624,795.86
0.00
41,624,795.86
2,424,638.03
596,191.13
62,219,851.37
0.00
62,219,851.37
1,395,496.53
1,810,261.38
49,391,574.72
0.00
49,391,574.72
0.00
3,313,284.34
31,696,088.07
0.00
31,696,088.07
0.00
3,643,503.66
118,584,340.26
1,105,404.96
117,478,935.30
0.00
4,103,991.95
147,730,043.84
2,635,298.73
145,094,745.11
0.00
4,855,712.31
87,062,015.07
3,202,199.84
83,859,815.23
1,186,246.38
5,943,753.48
68,112,870.03
4,390,624.09
63,722,245.94
1,098,579.63
6,554,020.70
91,206,208.19
7,633,158.67
83,573,049.52
1,165,256.68
6,484,201.02
76,539,217.77
21,332,670.75
55,206,547.02
2,166,183.33
6,653,254.21
Total
774,167,005.18
40,299,357.04
733,867,648.14
9,436,400.58
43,958,174.18
14 INTERNATIONAL MONETARY FUND
HONDURAS
STATISTICAL ISSUES
(As of June 2016)
I. Assessment of Data Adequacy for Surveillance
General: Data provided to the Fund are broadly adequate for surveillance and program
monitoring purposes. Data on the banking system, the public finances, trade, and external debt,
national accounts and prices broadly satisfy the criteria required for surveillance and program
monitoring purposes. However, monitoring will benefit from both better timing of data release and
more comprehensive data coverage. Regarding timing, data release dates should be predetermined
and published online to increase predictability of economic forecasts. On data coverage, estimates
of average wages and unit labor costs will help assess competitiveness and conducting a
comprehensive household survey will help evaluate labor market conditions. Some issues that were
flagged in the previous Article IV but have not been fully addressed includes the lack of
comprehensive data on the financial operations of public enterprises, insufficient coverage of
financial institutions, improving estimate of arrears and floating debt of public entities, enhancing
reporting of government guarantees and fiscal contingent liabilities, and a valid and reliable
methodology to estimate private capital flows. The authorities implemented in June 2016, the
Enhanced General Data Dissemination System (e-GDDS), which was endorsed by the IMF’s Executive
Board in May 2015. This makes Honduras the first IMF member in the Western Hemisphere to
implement those recommendations.
National Accounts: The Central Bank of Honduras (BCH) compiles the national accounts estimates
following the System of National Accounts 1993 (1993 SNA), rev. 4. The base year is 2000. The BCH
has published quarterly GDP data that are fully consistent with the new annual series. The BCH
annually provides the Honduran Institute of Tourism (ITH) with basic detailed data of the input-
output matrix in order to develop the Tourism Satellite Account in the framework of national
accounts (expected to be published during the second semester). The BCH is working on updating
the base year, including adopting the main recommendations of the 2008 SNA, with support of TA
from an independent consultant and CAPTAC-DR.
Price Statistics: The BCH prepares and publishes (since April 2000) the consumer price index (CPI),
with reference period December 1999 = 100. The selection of products included in the CPI basket
and corresponding weights are based on the National Household Income and Expenditure Survey
(NHIES) of 1998–1999. A new NHIES for 2016-2017 is expected to begin shortly. The BCH also
revised the producer price index by expanding its coverage and updating its base and classification,
in the context of the revision of the national accounts; preliminary estimations of this index were
made and its release is expected soon. This index includes goods for processing activities (maquila),
trade and transport margins, making it difficult to use it in the compilation of national accounts at
constant prices.
Government Finance Statistics: The Ministry of Finance (SEFIN) compiles and disseminates
INTERNATIONAL MONETARY FUND
15
HONDURAS
government finance statistics (GFS) covering central administration, central government, general
government, and nonfinancial public sector. The above-the-line data of these sectors are reported
to WHD, along with below-the-line data for central administration and nonfinancial public sector,
which are provided by the BCH. Currently, the SEFIN and the BCH are participating in the GFS
harmonization project for Central America, Panama, and Dominican Republic. Under this project,
country participants will elaborate and publish comparable GFS across countries to permit a
comparative analysis of fiscal developments and facilitate the regional policy dialogue. The
components of the projects are: (i) compilation and dissemination of GFS sub-annual and annual
using the GFSM 2001 framework, and (ii) preparation of a detailed migration plan for gradual
adoption of the full GFSM 2001 framework. A mechanism to collect data systematically of arrears
and floating debt of public entities, particularly public enterprises are needed.
Monetary and Financial Statistics: Monetary and financial statistics (MFS) are reported on a regular
monthly basis to STA using the standardized report forms (SRFs) for the central bank, other
depository corporations, and other financial corporations (OFCs). However, pension funds and
financial auxiliaries are excluded from the institutional coverage of OFCs. The inclusion of pension
funds and cross-sectoral data consistency between MFS and other data sets are the major issues
that should be addressed by the authorities.
Financial sector surveillance: The authorities report nine out of 12 core financial soundness indicators
and five of the encouraged set.
External sector statistics: Honduras has achieved significant milestones in the context of the CAPTAC-
DR’s Regional Harmonization Project of External Sector Statistics, which ended in December 2015.
The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP)
statistics, and monthly the Data Template on International Reserves and Foreign Currency Liquidity.
Honduras also participates in the Coordinated Direct Investment Survey (CDIS) and the Coordinated
Portfolio Investment Survey (CPIS). Work in progress at the BCH aims at (a) improving the coverage
of the surveys on nonfinancial corporations, and, particularly, on direct investment enterprises, (b)
improving the coverage of external debt statistics; (c) ensuring consistency between external debt
statistics and IIP statistics, and, (d) completing the migration to a BPM6 basis of recording and
dissemination of external sector statistics.
II. Data Standards and Quality
The country is an e-GDDS participant. STA conducted
Data ROSC was published on July 29, 2005.
an e-GDDS mission in March 2016. The authorities
updated their metadata where appropriate. The
authorities also introduced a new National Summary
Data Page to serve as a one-stop portal for essential
macroeconomic data and metadata.
16 INTERNATIONAL MONETARY FUND
HONDURAS
Appendix I. Table of Common Indicators Required for
Surveillance
Date of latest
observation
(For all dates in
table, please use
format dd/mm/yy)
Date
received
Frequency
of Data7
Frequency of
Reporting7
Frequency of
Publication7
Memo Items:8
Data Quality –
Methodologic
al soundness9
Data Quality –
Accuracy and
reliability10
Exchange Rates
International Reserve Assets and
Reserve Liabilities of the Monetary
Authorities1
Reserve/Base Money
Broad Money
Central Bank Balance Sheet
Consolidated Balance Sheet of the
Banking System
Interest Rates2
Consumer Price Index
Revenue, Expenditure, Balance and
Composition of Financing3 – General
Government4
Revenue, Expenditure, Balance and
Composition of Financing3– Central
Government
Stocks of Central Government and
Central Government-Guaranteed
Debt5
External Current Account Balance
Exports and Imports of Goods and
Services
GDP/GNP
04/10/16
05/10/16
29/09/16
04/10/16
29/09/16
31/07/16
29/09/16
31/07/16
31/09/16
31/09/16
30/06/16
04/10/16
14/09/16
04/10/16
14/09/16
01/10/16
04/10/16
30/08/16
30/06/16
30/08/16
30/06/16
30/08/16
30/06/16
30/09/16
31/07/16
15/09/16
30/06/15
21/09/16
Gross External Debt
30/07/16
15/08/16
International Investment Position6
30/06/15
30/09/16
D
D
D
M
D
M
M
M
Q
Q
Q
Q
M
Q
M
Q
D
W
W
M
M
M
M
M
Q
Q
Q
Q
M
Q
M
Q
D
D
D
M
D
M
M
M
Q
Q
Q
Q
M
Q
M
Q
1 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked
to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including
those linked to a foreign currency but settled by other means.
2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3 Foreign, domestic bank, and domestic nonbank financing.
4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local
governments.
5 Including currency and maturity composition.
6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
8 These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.
9 This reflects the assessment provided in the data ROSC or the Substantive Update (published on ..., and based on the findings of the mission that
took place during...) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning
concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed
(LNO); not observed (NO); and not available (NA).
10 Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical
techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.
INTERNATIONAL MONETARY FUND
17
Statement by Hurtado, Executive Director for Honduras
and Ms. Garcia Corzo, Advisor to the Executive Director
October 26, 2016
The Honduran authorities thank staff for the candid and productive discussions during 2016
Article IV Consultation and Third and Fourth Reviews Under the Stand-By Arrangement
(SBA) and Standby Credit Facility (SCF). They also thank Management and Executive
Directors for their continued support.
In 2013, Honduras medium-term economic and development prospects were undermined by
fiscal imbalances, weak external position and structural weaknesses. A strong comprehensive
fiscal consolidation strategy and an ambitious structural reform plan were needed to preserve
fiscal sustainability and pave the way for higher sustainable and inclusive economic growth.
In October 2016, after almost two years of successful program implementation and strong
ownership by the government, Honduras has taken significant steps on the right path for
achieving its economic and development goals over the medium-term. Fiscal sustainability
has been restored, fiscal prudence has been institutionalized with the approval of the Fiscal
Responsibility Law, social expenditure has been protected, public investment has increased,
the external position has been strengthened, significant advances have been made on
structural reforms (including tax administration, state-owned enterprises and the public wage
bill) and investment confidence has been bolstered. Furthermore, successful program
implementation has been a catalyst for other multilateral and bilateral donors’ support as well
as for sovereign credit ratings upgrades.
Recent economic developments
Economic activity remains strong. The quarterly GDP increased 4.5 percent (yoy) during
the second quarter of 2016, with all economic sectors reporting a positive performance. The
main economic activities contributing to growth were financial intermediation, manufactures,
agriculture, communications, energy and commerce. On the expenditure side, growth was
supported mainly by exports and private consumption encouraged by lower gasoline prices
and strong remittances inflows. The economic outlook for the remainder of the year is
positive. Real GDP growth is projected at 3.6 percent in 2016, supported by increased public
sector infrastructure investment and a supportive monetary policy stance.
Lower international commodity prices continue impacting the external accounts. As of
June 2016, total exports have decreased by 5.5 percent (yoy) mainly due to lower exports of
coffee (-22.6 percent) as a result of a reduction of about 19 percent in prices and to a lesser
extent of exported volumes (-4.5 percent). Total imports reported a contraction of 9.4 percent
during the same period, mainly due to lower imports of machinery for energy plants already
in operation and to lower fuel prices as imports of fuels decreased about 22 percent. As a
2
result, the trade deficit improved by 21.8 percent. Remittances inflows increased by about 6
percent during the same period and are expected to remain strong, reaching almost 19 percent
of GDP by end-2016. A current account deficit of 5.3 percent of GDP is expected for end-
2016 (9.5 percent of GDP at end-2013).
Inflation and inflation expectations remain contained. Headline and core inflation
continued their downward trend reaching 2.90 percent and 3.29 percent (yoy), respectively,
in September, supported by continued low oil prices and a still negative output gap, while
inflation expectations set the rate at 2.96 percent by the end of the year, below the lower band
of the inflation target range of 4.5 +/- 1 percent set by the Central Bank. Considering that
inflationary pressures are contained, the Central Bank has implemented a more supportive
monetary policy stance by reducing its monetary policy interest rate in 150 bps from 7.00
percent in December 2014 to 5.50 percent in June 2016. This reduction has already translated
to lower interest rates in the banking system as interest rates for loans in local currency have
decreased 79 bps from Dec-2015 to July-2016 and 143 bps since Dec-2014. Regarding
interest rates for loans in foreign currency, the downward trend shown during the last years
has changed in recent months, showing an increase of 11 bps from Dec-15 to July-2016.
Meanwhile, total credit to the private sector increased by 10.9 percent as of July (yoy) mainly
supported by credit in local currency (13.7 percent increase) which accounts for more than 70
percent of total credit. Credit in foreign currency increased by 4.0 percent as of July,
significantly lower than the two-digit growth rates observed in previous years (18.2 percent
in Dec-2013), in part due to the tightening of regulations on credit to unhedged borrowers.
The banking system remains sound and profitable while actions are being taken to
further strengthen its supervision and legal frameworks. The capital adequacy ratio was
13.7 percent as of July, above the 10 percent minimum legally required; the ratio of non-
performing loans to total loans was 3.6 percent with more than a 100 percent coverage; the
return on equity reached 13.6 percent and liquid assets represented 3.3 percent of deposits.
Furthermore, actions are being taken to reduce risks in the financial sector including by
strengthening the legal framework for bank resolution; upgrading an early warning
committee to perform as a Financial Stability Council; adopting higher capital requirements
for foreign-currency borrowing by unhedged agents; issuing new guidelines to strengthen
pension funds’ investment policies and governance according to international best practices;
and strengthening anti-money laundering regulations including the recent resolution issued
by the Central Bank to reduce the amount of cash deposits in local and foreign currency on a
monthly basis. Also, the Fund is providing TA to strengthen the macro-prudential framework
and the results from the recent Financial Sector Stability Review mission will provide key
additional elements to further improve the financial system’s supervision and legal
framework.
Fiscal discipline has been restored. The balance of the non-financial public sector was 0.9
percent of GDP by June, supported by strong tax collections (17 percent annual increase) and
3
expenditure control. However, a deficit of 1.5 percent of GDP is expected at the end of 2016
(well below the 7.2 and 3.9 percent of GDP of 2013 and 2014, respectively), to accommodate
higher infrastructure and social spending, As of June, total public debt was 46.3 percent of
GDP of which 34 percent was denominated in local currency and 74 percent was at fixed
interest rates. Also, less than 5 percent of total debt is due within the next year.
Fiscal policy is expected to become more prudent, predictable and transparent. In April,
Congress approved the Fiscal Responsibility Law which will lock-in fiscal discipline and
increase fiscal policy predictability and transparency by: i) establishing limits to the non-
financial public sector deficit, the annual growth rate of nominal current expenditure and new
arrears; ii) instituting the adoption and publication of a medium-term fiscal framework whose
implementation has to be reported to Congress on an annual basis by the Secretary of
Finance; and iii) establishing that all trust funds (former and new) financed with public
resources should be managed within the public budget. Regarding control of the payroll,
important advances have been made as currently all payrolls in the central administration are
executed through the integrated financial management information system which is linked to
the public employment management system.
The government launched a five-year strategic program to foster employment and
economic growth. The program was launched earlier this year and approved by Congress in
April. It benefits from a broad support of the private sector and focuses on six key sectors:
i) tourism; ii) textile industry; iii) intermediate manufactures; iv) services to support
businesses (e.g. call centers); v) housing; and vi) agroindustry. A specific entity was created
to coordinate program implementation; its Executive Director will report to a board
comprised by members of government and private sector.
Strengthening institutions and fostering investment climate
The tax authority has undergone complete overhaul with a new and strengthened tax
authority already in place which is in the process of hiring and training new personnel. The
new agency will be fully operational early next year. Customs reforms are also ongoing, a
detailed mapping of the business process has been established and operating manuals have
been issued and implemented in one of the seaports as a pilot to enhance collection of import
duties in gasoline and bulk freight.
Measures to strengthen the financial position of the energy company (ENEE) are
ongoing. Besides the reduction of the wage bill, the creation of an independent regulatory
agency for the electricity sector (CREE) and the appointment of its three commissions, all
measures taken last year, in 2016 the CREE has put in place a comprehensive tariff scheme
that will secure cost recovery. Furthermore, the government is implementing an aggressive
plan to reduce non-technical electricity losses, maintain and upgrade the distribution network
4
and streamline costs. Specific targets for the reduction of non-technical losses have been set
for the current and the next six years.
The operational framework for conducting monetary policy keeps improving. The
Central Bank (BCH) has introduced daily liquidity auctions and is working on further
improving its liquidity forecasting and management. Furthermore, the information exchange
with the Secretary of Finance, which will improve monetary and fiscal policy coordination,
was recently formalized through an agreement between the two institutions. Also, with TA
from the Fund, BCH plans to develop the interbank market and increase the signaling content
of the monetary policy rate. With support from the Fund, BCH has decided to gradually
implement an inflation-forecast targeting framework which will be accompanied by
continued progress towards a more flexible exchange rate. In order to reduce excess liquidity
and within a medium-term strategy to phase out mandatory investments for financial
institutions, in September the Central Bank increased reserve requirements from 7 percent to
12 percent and reduced mandatory investments (mainly in government bonds) from 10
percent to 5 percent.
Decisive actions are being taken on fighting corruption, strengthening the rule of law
and reducing the levels of crime and violence. Earlier this year, the government and the
Organization of American States (OAS) signed an agreement to establish the Mission to
Support the Fight Against Corruption and Impunity in Honduras (MACCIH). Its areas of
action are based on four components: i) prevention of and combating corruption; ii) reform of
the criminal justice system; iii) political and electoral reform; and iv) public security. It is
expected that MACCIH will be fully operational shortly and its members will provide active
cooperation, technical advice, supervision and oversight of the state institutions responsible
for preventing, investigating, and prosecuting corruption. Furthermore, the government has
made the reduction of crime and violence one of its top priorities. Progress on this front
include an ongoing strong police force reform as well as a comprehensive plan to fight gangs
and drug trafficking which is being implemented in close coordination with the governments
of neighboring countries (El Salvador and Guatemala). Also, the budget allocated for security
purposes is expected to continue increasing in the following year.
Improving social programs management. The government is working with the World
Bank to strengthen management of the conditional cash transfers program (Bono Vida
Mejor) to ensure that it is more effective, cost efficient and transparent. Also, additional
resources have been secured for the rest of the year as the government seeks to expand
coverage of the extreme poor to reach 300,000 families by 2017. The Secretaries of Labor
and Social Security, Education, and Social Inclusion are developing a study to identify ways
of formalizing the linkages between existing Active Labor Market Programs and CCT
beneficiaries to support the transition from schools to jobs and with microenterprise
programs to support entrepreneurial opportunities.
5
Investment confidence has improved. Besides the actions being taken to fight crime,
violence and corruption as well as to strengthening the rule of law and preserving
macroeconomic and financial stability, the government has been working on promoting
doing business easing. The progress made so far on these areas has been recognized by credit
rating agencies Moody’s and Standard & Poor’s by improving Honduras’ ratings (Moody’s)
and setting a positive outlook (both) in May and July, respectively, reflecting the view of
continued progress on fiscal policy and reform agenda for the near term. Furthermore,
Honduras improved five positions on the ease of doing business 2016 World Bank ranking
(110 out of 189); it was also highlighted in the report as the country that improved the most
(43 positions) in the area of protecting minority investors in the last years and was noted
among the countries with more improvement on strengthening frameworks for secured
transactions.
Regarding program implementation, most performance criteria (PC) and all of the
indicative targets for end-December 2015 and end-June 2016 have been met. The PC on
net domestic assets of the Central Bank for end-December 2015 was missed by a minor
deviation and corrected by end-June 2016. Also, the authorities have taken the corrective
measures to address the deviation from the net-lending by public pension funds program
target for end-June 2016 as well as to clear the temporary increase in domestic arrears from
the National Electricity Company. Thus, on behalf of our authorities we request a waiver for
these nonobservances. We also request the completion of the Third and Fourth Reviews
under SBA and SCF arrangements.
The authorities remain confident that the planned policy mix is adequate for a successful
implementation of the program. Nonetheless, the government stands ready to take additional
measures that may be required to achieve program objectives. The program will continue to
be treated as precautionary.